photo credit: s_falkow

The foreclosure settlement between the U.S. government and banks has finally arrived. Last Thursday, the $26 billion settlement was dubbed the largest multi-state settlement since the infamous 1998 tobacco agreement. However, this new settlement isn't big enough to provide real help to the average homeowner. It is purported that this settlement might even pose a detriment to the housing market since it sends a worrying message. To homeowners who have been scrimping and saving in order to keep up with their monthly mortgage payments, that message is: the only owners who are rewarded in this country are those who have been irresponsible and don't pay back their mortgage loans. Policymakers argue that this is simply the "moral hazard fallout" from the settlement. Have banks and lenders again only received a slap on the wrist? It is no secret that it may be the banks that benefit most from this settlement. The Wall Street Journal explains the break-down: "$5 billion in cash payments, including $1.5 billion to borrowers who were wrongly or illegally foreclosed on between September 2008 and December 2011. Borrowers could receive up to $2,000, depending on the number filing claims." But will $2,000 really be useful to the homeowners who have already lost their homes? The $20,000 loan modification seems like a great idea, but it loses some of its luster when we realize that the average debt on an underwater mortgage is $50,000! The Wall Street Journal goes on to explain that banks will receive $20 billion in credits "for principal write-downs and other aid to homeowners at risk of default. This tally includes $3 billion for refinancing of mortgages currently underwater." (It is also not clear for what the extra $1 billion is earmarked.)

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