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John E. Sununu

Who loses in foreclosure settlement?

WATCHING THE country’s biggest banks, 49 states, and the federal government stumble toward a $25 billion mortgage foreclosure settlement brings back memories: Just like the 1998 Big Tobacco deal, this is a complex agreement with lots of moving parts. And just like the tobacco settlement, it’s far more than a legal matter - it’s a grand spectacle built around money, politics, and lots of heated rhetoric.

The press releases for the foreclosure deal will be thick with words like “fairness’’ and “forgiveness,’’ but don’t think for a moment that it represents a resounding victory over the big, bad banks. Sure, there are losers in this settlement. They just weren’t at the negotiating table.

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If you want to understand what’s really going on, look to Rome. What did the Romans know about mortgage-backed securities? Nothing. But they knew spectacle when they saw it, and left us a timeless tool to help us see through it. “Cui bono?’’ was the question posed by the consul Lucius Cassius. More simply: “Who benefits?’’

The state attorneys general who led the crusade will trumpet the deal as comeuppance for banks that employed shoddy practices in past foreclosures. The banks will grimace and go along with that story line, because it’s in their interest. If the agreement weren’t preferable to the alternative - letting states pursue separate cases against them - they would never sign. Though $25 billion is a lot of money, each bank weighs its cost against what it would otherwise spend. Its choice is based on the best outcome for shareholders. And if banks cut a bad deal, there are plenty of lawyers waiting to sue on behalf of unhappy shareholders.

The AGs are still winners. They get great headlines and have an issue to take on the campaign trail. These are politicians after all; AGs are elected in 43 states. (New Hampshire is one of a handful where the position is appointed.) They’ll take credit for punishing “bad’’ banks, returning money to consumers, and reforming foreclosure practices. Of course, states take a pile of cash for themselves - as much as $5 billion for homeowner funds they control.

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Last among the winners are those foreclosed-upon and underwater homeowners lucky enough to get a piece of the settlement. The banks will pay about $1,500 to a million homeowners who lost homes to foreclosure. Another 850,000 who owe more than their homes are worth could have their principal reduced by $20,000. But the wheels of bureaucracy turn slowly. It will take two months to choose a program administrator, and another nine months to figure out exactly who gets help.

But for those Americans who aren’t underwater, or who kept up with mortgage payments, the answer to “cui bono?’’ is: not you. In fact, there are two key aspects to the settlement that will continue to work against you. First, the protracted negotiation and litigation have dragged out the process by which housing markets stabilize and begin to recover. More ominously, completing the settlement will allow servicers to return abruptly to a higher pace of foreclosure; many had slowed action pending its final outcome. As more foreclosed homes hit the market at once, it could put even more downward pressure on prices.

Bondholders will lose as well. Not all of the existing loans are held in bank portfolios; some have been securitized and sold. When loan principal is written off, as the settlement demands, it decreases the value of the underlying securities. Someone somewhere will feel the aggregate write-off of $17 billion; many bonds are held by pension funds and university endowments. Those investors will demand higher returns next time - rates that will be paid by future borrowers. In the same way, bank costs will be borne by customers through higher fees and lower returns on deposits.

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Those costs should be a reminder. For all the months of negotiation, the result here is zero-sum. No products or wealth have been created. Resources have simply been redistributed from one set of parties to another. From the banks, yes; but from their customers, from future homeowners, and from bondholders as well.

In Cassius’ day, rulers entertained the masses with battle reenactments in the Coliseum. Today, public spectacles like this deal are much more restrained, but it still isn’t always easy to tell the good guys from the bad. Fourteen years after Big Tobacco was taken to the AGs’ woodshed, few states spend their “tobacco money’’ on smoking prevention, and tobacco company stocks are higher than ever. Cui bono, indeed.


John E. Sununu, a regular contributor, is a former US senator from New Hampshire.