Will Mortgage Settlement Have a Large Impact on the Housing Market?

The Administration is touting its latest plan designed to help homeowners and to repair the struggling real estate market. They have high hopes for the $26 billion foreclosure settlement made with five big banks on February 9.

But will this latest effort really turn the housing market around or is it just another political ploy in an election year? It’s hard to tell just how effective this will turn out to be. Three weeks after the government came to an agreement with the banks, experts continue to disagree.

To get a better understanding let’s take a look back at the basics as covered in Gretchen Morgenson’s excellent article in the New York Times: “The Deal is Done But Hold the Applause.”

What does the deal provide?  Over the next three years five big banks will spend $17 billion to help approximately 2 million underwater homeowners by reducing the principal on their loans. In addition, qualifying borrowers will get refinancing to the tune of  $3 billion. The banks will also hand over $5 billion in cash: $3.5 billion to states and $1.5 billion to some homeowners who were improperly foreclosed on.

It sounds like an enormous amount of money, but not when compared to the size of the problem. According to Paul Diggle, property economist at Capital Economics in London, “Close to 11 million borrowers are underwater on their loans to the tune of $700 billion in total.” In addition the average amount underwater is $50,000. 

This plan would help approximately two million borrowers and would reduce their loan by $20,000.  As for the total amount - $17 billion in write-downs would be about 2.4 percent of the total negative equity weighing down borrowers across the nation now. 

Of the 4 million Americans who have been through foreclosure since early 2007 – this plan would give about $2000 to 750,000 people who have lost their homes.  Not exactly enough for the down payment on a new home.  It appears that this is a baby step in the right direction but much more is needed if we are to really help underwater homeowners and help the housing market rebound.