Issue of the week: Can a mortgage deal revive housing?

Five big banks reached a settlement with state and federal officials to pay $26 billion to offset some of the damage caused by their misdeeds in the foreclosure crisis.

Five big banks just got off with a “wrist slap” for their misdeeds in the foreclosure crisis, said The New York Times in an editorial. Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial reached a settlement last week with state and federal officials to pay $26 billion to offset some of the damage they caused by “robo-signing” foreclosure notices, wrongly denying loan modifications, and charging mortgage holders excessive late fees. About $20 billion of that money will go to writing down homeowners’ loans and refinancing mortgages at lower rates, and some 750,000 people who lost their homes to foreclosure between 2008 and 2011 will be given $2,000 each. But this amounts to a “sweet deal” for the banks, since it shields them from most future civil lawsuits arising from their mortgage misconduct.

The settlement “really is a win for all sides,” said Felix Salmon in Reuters.com. Some struggling homeowners will get the refinancing they need, the authorities get to claim a big victory, and the banks get a deal that is “not nearly as expensive as it might look at first glance.” By reducing mortgage principals, they will make more in the long run than they would if left stuck with dead-end loans that couldn’t be repaid. But even if it’s just a “quasi-punishment,” said The Washington Post, this deal lifts a legal cloud hanging over the banks. Now they can get on with clearing the backlog of pending foreclosures, so the housing market can begin to recover.

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