Depending on who you talked to, the massive mortgage servicer settlement announced Thursday was either a "criminal sell out" or a much-needed shot in the arm for the housing market.
In reality, however, it appeared to be neither.

After more than a year of debates, fits and starts, dramatic overtures and apparent missteps, the settlement itself was a bit of an anti-climax.

The numbers were high – $25 billion, with an additional $1 billion in civil money penalties from the federal banking regulators — but the impact, both politically and on the industry, appeared to be minimal. The final agreement did little to protect banks from lawsuits over a host of other mortgage-related issues, including lending practices and securitization sales, while even President Obama declared the offered relief as "just the start."

Aside from those involved, few wanted to make sweeping statements about its lasting significance.

"The impact will be relatively small, compared to the size of the problem," says Philip Swagel, a Treasury Department official from 2006 to 2009.

Swagel, now a professor at the University of Maryland's School of Public Policy, says the settlement would remove some uncertainty for banks but failed to address the $700 billion gap between what U.S. homeowners are paying on their mortgages and what their homes are worth.
Even while touting the deal, Obama seemed to agree. In remarks in the early afternoon, he used the agreement as a call for Congress to enact his recently proposed massive refinancing plan.
"It would help millions of homeowners who make their payments on time save hundreds of dollars a month, and it can broaden the impact building off this settlement," Obama said.
Arguably the biggest beneficiary of the deal was Obama himself.

The president has aggressively positioned himself in the campaign as running against Wall Street. The deal serves to remind voters of misdeeds by banks even as it reinforces the idea that the Obama administration is committed to penalizing those firms responsible for the housing crisis.

Senate Democrats, too, see value in the deal.

"This provides real relief for homeowners," Sen. Jack Reed, D-R.I., said in an interview. "It seems to be economically beneficial for the banks also. It makes a lot more sense to be able to write down a mortgage, keep someone in their home, than to go through the process of foreclosure, [with] months and months and months of the uncertainty."

Reed adds that the settlement also helps to clarify banks' legal liabilities.

"That helps them, too, going forward," Reed says. "It's less uncertainty weighing on their ability to make loans and to be able to boost up the health of the mortgage market."
But aside from a few vocal standouts — Oklahoma Republican Attorney General Scott Pruit being the most notable — GOP officials did not rush to criticize the deal.

"We'll have to evaluate the details of it, and what it's going to cost," said Sen. Richard Shelby, the top Republican on the Senate Banking Committee. "You know, we're all interested in helping people, especially where there's been fraud and mismanagement. But I haven't seen the details."

Rep. Scott Garrett, R-N.J., the chairman of the House subcommittee with oversight of the government-sponsored enterprises, did not take issue with the agreement itself, but instead downplayed its significance.

"We shouldn't fool ourselves into believing this is the medication we need to cure our ailing housing market," he said in a press release. "While this announcement may give the Obama administration some positive headlines, it will do absolutely nothing to fix the structural deficiencies of our nation's housing system. Transferring wealth from one block of Americans to another is no way to fix the problem."

Pruitt, meanwhile, was the lone hold-out among state attorneys general signing onto the deal. He argued that state AGs and the Obama administration had no right to demand principal reductions as part of the deal.

"We had concerns that what started as an effort to correct specific practices harmful to consumers morphed into an attempt by President Obama to establish an overarching regulatory scheme, which Congress had previously rejected, to fundamentally restructure the mortgage industry in the United States," Pruitt said in a press release.

On the other side, Iowa Attorney General Tom Miller, who led negotiations for the states, said the agreement wasn't getting enough credit. In a conference call with reporters, he argued that the resulting principal reductions would prove the value of such an approach to help the housing market.

To date, some institutions — including Fannie Mae and Freddie Mac — have resisted such loan reductions. Miller pinpointed a principal reduction plan agreed to by Bank of America Corp. as part of the settlement, which he described as appropriately broad.

"What we're going to see happening is that principal reduction is going to be done on a substantial scale, and once it's done people are going to see it works," he said. "Right now, there's a lot of opposition, particularly from Fannie and Freddie. They think the sky is going to fall — that if we start doing principal reduction everybody is going to default. That's not going to happen."

Joining Miller on the call, North Carolina Attorney General Roy Cooper said the deal is different from past federal programs to help troubled borrowers — such as the Home Affordable Modification Program — where despite public resources participation by servicers was essentially voluntary.

"There have been some efforts in the past with Hamp and other programs to try to help homeowners," Cooper said. "Strong, court-ordered enforcement with teeth distinguishes this deal from those earlier efforts to help homeowners through this foreclosure crisis."

Joe Adler and Kevin Wack contributed to this article

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.