Mortgage settlement: One step forward, one step back

The deal, fortunately, held the line against a massive bailout at the expense of either the taxpayers or big mortgage investors like pension funds. Some might be tired of hearing about investors’ rights or pension fund interests, but in order for the housing market to recover, aspiring homeowners need access to credit, which is generally provided by investors. The backlash from a taxpayer-financed bailout would have been substantial. Thankfully that didn’t happen.
 
{mosads}The most important upside stemming from the announcement is the measure of legal certainty that could help new capital — which has been sitting on the sidelines waiting for things to settle out — to start flowing back into mortgage lending once again. Litigation risk and legal uncertainty have been key factors in pinning down a recovery. By providing for finality, the settlement on its face has the potential to provide at least a modest boost to the housing market.
 
An additional outcome of the deal is that lifting the legal cloud will permit unavoidable foreclosures to resume. Remember, even when the housing market was strong, hundreds of thousands of foreclosures occurred. In many states, the foreclosure process takes between two and three years. The key is to have a fair process, but one that also acknowledges that the path to a recovery in housing will be marked with legitimate foreclosures — as unfortunate and tragic as that may be. Contrary to what some have said, the housing market does need to hit bottom before a recovery can take hold. In fact, it’s the definition of a recovery. But, in order to find the bottom, the vast inventory of vacant homes needs to flow back through the market.
 
Unfortunately, this is not where the legal saga ends. The hoped-for legal certainty was immediately called into question when the settlement was presented by some government prosecutors as only a “down payment” on continued punishment for the mortgage lending industry. This view was quickly reinforced by the simultaneous lawsuit filed by New York’s attorney general regarding certain mortgage bond practices. And, the Department of Justice recently decided to create what amounts to the nation’s third task force focused on mortgage problems since 2008.
 
It’s been about 5 years since the housing bubble popped. The common cause should be reducing the amount of time the market rests at or near the bottom. An announcement that the bulk of the outstanding legal issues had been resolved would have been a major accomplishment. Yet, for all its positives, the rhetoric around this mortgage settlement sounds more like one step forward, and one step back. 
 
Papagianis served as special assistant for domestic policy to President George W. Bush. He is now the managing director of Economics21, a nonpartisan policy-research institute.