Foreclosure settlement: The latest ‘back-door bailout’ for the banks?

There’s been a whole lot said about the recent $25 billion foreclosure settlement between five of the nation’s largest banks and 49 states.

The settlement has received a host of criticisms regarding the mere $2,000 borrowers who were wrongfully foreclosed will receive as part of the deal (what’s $2,000 going to do for someone who lost their home because of a bank’s mistake?).

But the latest shock involving the robo settlement was documented in a recent blog post by Houston Chronicle columnist Loren Steffy titled, “Hidden taxpayers costs emerge from mortgage settlement.”

All costs shifted to taxpayers

Steffy begins his post by noting that the final terms of the foreclosure settlement haven’t been filed yet, and that “raises concerns that the terms of the deal could be changing.” Under the current terms, the banks have agreed to pay billions towards reducing borrower principal as part of widespread modifications.

But as the Financial Times reported yesterday, these fines aren’t exactly what they seem.

“A clause in the provisional agreement – which has not been made public – allows the banks to count future loan modifications made under a 2009 foreclosure-prevention initiative towards their restructuring obligations for the new settlement, according to people familiar with the matter,” wrote Shahien Nasiripour of FT. “The existing $30bn initiative, the Home Affordable Modification Programme (Hamp), provides taxpayer funds as an incentive to banks, third party investors and troubled borrowers to arrange loan modifications.”

It appears as though the banks can simply shift the costs associated with HAMP to this recent settlement. The Financial Times describes it as such:

“BofA, for instance, will be able to use future modifications made under Hamp towards the $7.6bn in borrower assistance it is committed to provide under the settlement. Under Hamp, the bank will receive payments for averting borrower default and reimbursement from taxpayers for principal written down.”

Another bailout for the banks?

Apparently, during negotiations the states had concerns about this clause. “People familiar with the matter told the FT that state officials involved in the talks had had misgivings about allowing the banks to use taxpayer-financed loan restructurings as part of the settlement,” wrote Nasiripour. “State negotiators wanted the banks to modify mortgages using Hamp standards, which are seen as borrower-friendly, but did not want the banks to receive settlement credit when modifying Hamp loans. Federal officials pushed for it anyway, these people said.”

Essentially, banks aren’t really being penalized for their foreclosure abuses, their penalties are being shifted to (paid for by) the taxpayer. Steffy concludes that this “is yet another back-door bailout for the big banks.” Unbelievable.