State attorneys-general, federal officials, and five major mortgage servicers today announced a $25 billion settlement that will provide relief in various forms to struggling borrowers and those who have already lost their homes. Details had yet to be released as of this writing, but in broad sketch the deal includes:
- Principal reductions for underwater borrowers
- Interest rate reductions on existing loans
- New servicing requirements to prevent further abuses, including a single-point-of-contact requirement
- Payments to borrowers who lost their homes to foreclosure
- Funds for housing counseling and neighborhood stabilization
- Safer process for borrowers. If the servicing requirements meet expectations, families should have renewed confidence in the process of getting a mortgage to buy or refinance a home. Part of renewing confidence in housing markets must be overcoming the distrust and uncertainty created by the mortgage crisis.
- Clarity for lenders. Lenders have been very cautious in the aftermath of the bubble, making credit hard to get. The long-term uncertainty around servicing obligations, the bill for past actions, and the scope of future claims made it harder for lenders to take needed actions to prevent further foreclosures and lend more. Resolving that uncertainty should pave the way for foreclosure prevention measures beyond those in the settlement itself.
- Confidence for housing markets. The greater certainty for all participants in housing markets provided by this settlement will help restore those very markets. Ultimately, we need more activity in housing markets to break the cycle of uncertainty and disinvestment that is slowing not only housing but the overall economy.
- Relief for news readers. We no longer need to hear that a “settlement is imminent”!