Banks' $8.5 Billion Mortgage Settlement a Mild Slap on the Wrist
James Heintz: Settlement is a drop in the bucket compared to $6.9 trillion of lost household wealth - January 8, 2013
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James Heintz has written on a wide range of economic policy issues, including job creation, global labor standards, egalitarian macroeconomic strategies, and investment behavior. He has worked as an international consultant on projects in Ghana and South Africa, sponsored by the International Labor Organization and the United Nations Development Program, that focus on employment-oriented development policy. He is co-author, with Nancy Folbre, of The Ultimate Field Guide to the U.S. Economy. From 1996 to 1998, he worked as an economist at the National Labour and Economic Development Institute in Johannesburg , a policy think tank affiliated with the South African labor movement. His current work focuses on global labor standards, employment income, and poverty; employment policies for low- and middle-income countries; and the links between macroeconomic policies and distributive outcomes.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The PERI Report. These are reports by economists working at the Political Economy Research Institute in Amherst, Massachusetts.And now joining us from Amherst is James Heintz. James Heintz is associate director and research professor at PERI.Thanks for joining us, James.JAMES HEINTZ, ASSOC. RESEARCH PROFESSOR, PERI: Thanks a lot.JAY: So what are you working on this week?HEINTZ: Well, I think one of the exciting things that just was announced in today's news were two major settlements involving the mortgage lending practices of major U.S. banks in the U.S. during the crisis years, the crisis years that we've just been through. And the first of these settlements is the Bank of America settlement with Fannie Mae. And this was a mortgage fraud settlement where Fannie Mae had accepted mortgages that were originated by Bank of America and Bank of America's subsidiary, Countrywide Financial. But these mortgages in the mortgage application process wereâthe information on the mortgages was misrepresented or falsified. And mortgage fraud involves the misrepresentation of information in the mortgage application process in order to get mortgages approved or to be able to sell them on to another institution, such as Fannie Mae. And it came out that Bank of America and Countrywide Financial had been engaging in these practices leading up to the financial crisis, landing Fannie May with a huge number of bad mortgages based on falsified information. And so this settlement was for $10Â billion, a combination of Bank of America buying back some of the bad mortgages from Fannie Mae, and direct payments to Fannie Mae resulting from the mortgage fraud.I think this is really important, because mortgage fraud was central to the subprime mortgage crisis, the emergence of the subprime mortgage crisis, and that a lot of these mortgages didn't necessarily need to happen if the information was correct and due diligence was actually followed on the behalf of the lenders. And so it's an important case.The second case involves foreclosure and proper foreclosure practices among ten major U.S. banks. And so in this case it wasn't the beginning of the mortgage process, the origination of the mortgages that involve mortgage fraud in the Bank of America case, but actually the foreclosure process, where there was just improper review or a total lack of review of the documents involving foreclosure. And this might involve, you know, excessive fees that were part of the mortgages, the modifications to the mortgages not being properly reflected in the foreclosure agreements, and sometimes even the banks not even knowing whether they still held the mortgages or not. So there was a complete lack of review of these documents, with the result that many foreclosures probably went forward when they didn't really have to happen. This is a robosigning type of controversy. And robosigners are those bank employees who have a big stack of foreclosure documents, and they just sign off on the foreclosures.JAY: And how much was the settlement on this?HEINTZ: The settlement on this, it was $8.5Â billion. Three-point-three billion goes to people who faced foreclosure in 2009 and 2010, and the other $5.2Â billion is going to people who support people who are currently facing the risk of foreclosure, either helping them modify their mortgages or providing other types of relief.JAY: Right. Now, some of the criticism of these settlements goes to that this is sort of a cost of doing business for these banks. It's not enough money that they wouldn't perhaps do it again. And even more so, a lot of this behavior really was criminal behavior, and no one's going to jail for this.HEINTZ: Exactly. So if we're looking at these settlements, the first settlement, the Bank of America settlement, is $10Â billion. And that's going to Fannie Mae, a government-sponsored enterprise, mortgage giant.Of the other settlementâit's $8.5Â billionâthis is actually going to homeowners. But let's just break it down a little bit. If we look at the $3.3Â billion that's going to people who faced foreclosure in 2009 and 2010, there were 4.4Â million foreclosures in the U.S. during those two years. And so you divide $3.3Â billion among 4.4Â million foreclosures, and you don't get a huge amount for each foreclosure. Also, you know, not every single one of those foreclosures will be eligible for this. But even if you break it down, it's not a huge amount of money when we consider it in respect to the bailouts that have happened or the cost to households in the U.S. So no. Ifâthese banks, Bank of America and the ten banks in the foreclosure settlement, all received substantial bailout money from the Federal Reserve and the U.S. government. And Bloomberg news last year did an assessment of the size of these bailouts, and it was $7.7Â trillion. So that's $7.7Â trillion going to financial institutions, and the largest banks accounted for 60Â percent of that. But then, if we're looking at this settlement, we're looking at $8.5Â billion going to families and households, and that being divided among a huge number of households. So in terms of proportionality, it's just not there. The banks are not paying enough for what they actually had done.JAY: So more of a slap on a wrist than any real measures.HEINTZ: Yeah, I think that's right. And this is happening at a time where mortgage lending is actually a very profitable business for banks to be in. So what banks do is they originate mortgages with homeowners, and then they bundle those mortgages into new products, called mortgage securities, and then sell them on to other investors. But the money that they're getting in from the mortgages from the homeowners, those returns are fairly high now, and the amount that they have to pay back out to the investors to take on these mortgage securities are at an all-time low. So it's that gap between what they're getting in from homeowners and the payouts to investors that defines their profitability, and that's actually very, very high. So it's a very profitable time to be a mortgage lender. And the banks are actually doing okay, reporting higher and higher profits in recent quarters. But if we look at the household sector, the Federal Reserve has a survey of consumer finances thatâthe new version just came out this year. And it showed that between 2007, right before the crisis, and 2010, the net worth of households, the wealth of households declined by about 40Â percent, so a dramatic decline in the wealth that households have, setting them back about two decades in terms of the accumulation of wealth. And that hasn't necessarily come back, and yet households are still heavily indebted. And this is what's causing a major drag on the U.S. economy. Households just feel a lot less wealthy. They've been hit hard. There's been no bailout for them. And at the same time, they have very high levels of debt. So $8.5Â billion, when we compare it to the amount of wealth that's evaporated from households, which is about $6.9Â trillion, is a drop in the bucket at the very best.JAY: Alright. Thanks for joining us, James.HEINTZ: Thanks a lot.JAY: And thank you for joining us on The Real News Network.
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