The $25-billion settlement of the foreclosure mess is good for homeowners and good for the housing market.
But it's better for banks.
Not that this means homeowners are getting a raw deal. The settlement money will be used to lower people's debt and interest rates, and provide a little cash to those who lost their homes to funky foreclosure proceedings.
All that's welcome. As U.S. Atty. Gen. Eric H. Holder Jr. put it, the settlement "holds mortgage servicers accountable for abusive practices" and "requires substantial changes in how servicers do business."
And those practices were indeed abusive. Lenders cut corners on foreclosure proceedings and caused many people to lose their homes without even reviewing all the paperwork involved.
So now we have some modest comeuppance. Lenders will have to allocate $20 billion to various types of mortgage relief for borrowers, including the reduction of principal for homeowners who now owe more than their homes are worth.
As much as $7 billion will be allocated toward offering other forms of aid, including short sales, forbearance of principal for unemployed borrowers and assistance for homeowners whose homes have been foreclosed upon.
On top of that, loan servicers must pay $4.25 billion to the states participating in the deal, of which California is the big dog, and $750 million to the federal government.
So why is this good for banks? First, because it puts a very dark cloud behind them and eases investor anxiety. This should bolster their stock prices.
It also shields them from some lawsuits resulting from the foreclosure fiasco.
Those are hefty figures.
But to put things in a little perspective, BofA received $45 billion in bailout cash from taxpayers. Wells got $25 billion. Chase pocketed $25 billion.
They had to pay it back, but the point is that when the banks needed help, they were fully covered. Homeowners are now only part of the way out of the woods.
Millions of Americans either have lost their home to foreclosure in recent years or are facing foreclosure proceedings. Many more will struggle to stay in their homes even though they have little hope of ever having their property be worth more than what they owe in mortgage payments.
So, yes, there's now some accountability for banks for the damage they've done to people's lives. And I suspect this is the best deal that could have been cut for beleaguered homeowners, especially if the goal is to get them some relief sooner rather than later.
But will banks be left hurting as a result of this settlement? No.
In that sense, you could say, it's business as usual.
Lines of credit
Like many small-business owners, Marvin Smalheiser of Silver Lake maintains a line of credit to protect himself from cash-flow problems. The $50,000 credit line from Bank of America costs him $50 a year.
At least it did until he got a renewal notice from the bank recently informing him that his credit line will now run "1% of the commitment." In other words, Smalheiser will have to pay $500 a year for that same $50,000 safety net.
"That's a big jump," he said of the 900% increase. "It seems pretty outrageous to go from $50 a year to $500."
It does. Some might even say this is an effort to gouge a particularly vulnerable element of the bank's customer base that relies on credit lines to remain afloat during these uncertain times.
BofA sees it differently. Don Vecchiarello, a bank spokesman, said a "small percentage" of BofA's 1.4 million small-business customers are being notified that their annual fee for credit lines is changing.
He said many of these accounts had been obtained through acquisitions and had no maturity date or annual review process. "As a result," Vecchiarello said, "the decision was made to bring these loans in line with the vast majority of our — and the industry's — loan products."
In Smalheiser's case, though, he said he's been a BofA business customer for about 16 years and hasn't been party to any acquisitions. This is a case of the bank upping its own fee.
And that's why Smalheiser, publisher of a tai chi magazine, didn't hesitate to tell BofA what it could do with its 900% rate hike. He canceled his credit line.
If any other banks are seeking a stable small-business customer who pays his bills on time and is just looking for some fair treatment, they may want to look him up.