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» VISIT US ONLINE @ DSNEWS.COM POLICY PERSPECTIVE Six months since U.S. and state authorities struck a settlement with major mortgage servicers, it's difficult to pinpoint the pact's impact. W ith much fanfare, the Justice Department along with 49 states and the District of Columbia announced in February what was billed as a "historic settlement" with the country's five largest mortgage servicers to provide as much as $25 billion in relief to distressed borrowers and direct payments to states and the federal government. The mammoth agreement—yet another in a long series of efforts to unravel the tangled web of bad loans, foreclosures, and falling home values—could bring new meaning to "too big to fail." The pact with Ally/GMAC, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo is the largest multistate settlement since the tobacco settlement in 1998. (Fortynine states were included in the national servicing agreement; Oklahoma cut its own separate deal for $18.6 million.) While it may be hyperbole to compare bad loans with cigarettes, in many ways, the analogy is apt since the toxic mortgage assets the settlement aims at address were slowly poisoning lenders and servicers, not to mention the entire mortgage industry. Under terms of the deal, banks will pay some $20 billion to help borrowers avoid foreclosure. Most of that will go toward reducing loan principal balances for about 1 million of the 11 million households that owe more on their mortgages than their homes are worth. The banks will also pay $5 billion in cash to the federal and state governments. About a third of that money will go into a fund used for $2,000 payments to each of the roughly 750,000 Americans who were improperly foreclosed upon from 2008 through 2011. The banks will have to complete 75 percent of their loan-relief requirements by early 2014 and 100 percent one year later. Incentivized to Settle Both the banks and the attorneys general had incentives to reach a settlement. Banks were regularly pummeled in the media and by politicians while, at the same time, those elected officials were hearing a constant drumbeat from their constituents. Then, too, the mantra among economists was that addressing the uncertainty surrounding the settlement negotiations was a necessary precondition to a sustainable economic recovery. The building backlog of delinquent loans and foreclosures depressed prices, stalled sales of new and existing homes, and discouraged homebuilding with an obvious impact on construction employment. At the same time, manufacturers and others who depend on a robust home sales market felt the pinch. And underwater homes prevented unemployed 47

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