$25B Mortgage Foreclosure Settlement Expected To Affect Home Prices

Now that the foreclosures abuses settlement with BofA, Wells Fargo, Chase, Citi and Ally Financial has been finalized to the tune of $25+ billion, there is a lot of speculating about its impact.

There was no lack of lead up to the settlement. The general consensus, at present, is that an onslaught of foreclosures is likely, which would be painful in the short term for delinquent borrowers but ultimately benefit the housing recovery in the long term. Lenders slowed the pace of foreclosures during the year-plus trial, but now that the terms of the agreement have been ascertained,banks are likely to start processing the foreclosed properties that have accumulated.

As for the settlement’s impact on borrowers, it bears taking a closer look at exactly how that $25 billion has been allotted.

Only $1.5 billion will go towards direct compensation for servicing errors, which means that around 750,000 borrowers are eligible for payments of up to $2,000. The bulk of the settlement ($17 billion) will go towards principal reductions and other loan modifications, but the deal does not include loans owned or guaranteed by the GSEs, which excludes 92% of borrowers.

The deal is also predicted to flood the market with low-cost properties, which would cause a decline in home prices.

However, economists agree that the decline would be both temporary and modest. Plus, the banks need to start processing the backlog of foreclosure, which should help towards putting a floor under the housing market. But overall the industry greeted the agreement with a yawn, and the press was quick to point out the limiting factors.

To paraphrase a statement from a famous statesman, it is not the end, but perhaps the end of the beginning.