Wonkbook: Our last chance to stabilize the housing market

By Ezra Klein
Tuesday, March 8, 2011; 7:32 AM

My colleagues Brady Dennis and Dina ElBoghdady got their hands on an early version of the settlement that the country's attorney generals and a few federal agencies are hammering out with the big banks (http://wpo.st/Hkj2). This is the endgame to the mortgage servicing mess that dominated the news some months ago: the banks, having repeatedly broken the law while handling mortgage paperwork and conducting foreclosures, need to strike some sort of deal with regulatory authorities so they're not nipped to death by thousands and thousands of lawsuits. That means the state AGs and regulators have some leverage: the banks need relief from them, and so the question is how much relief they can get for homeowners in turn.

The hope is that they can get something capable of stabilizing the housing market. For all that the economy is improving, housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline. "The number one reason for nervousness about the economy in the next six to nine months is the foreclosure crisis," Moody's economist Mark Zandi told me last week.

With Congress no longer interested in acting to ease the foreclosure crisis -- or, it seems, the jobs crisis -- this settlement is perhaps our last shot at stabilizing the housing market. The big thing that advocates are looking for is "principal modification": a process in which borrowers who are underwater on their homes would see the amount they owe to the bank reduced. That looks to be in the proposed settlement, but the devil is in the details -- how much does the principal get reduced by, and under what circumstances? But if you can get those details right, a lot of experts think they could provide substantial relief. "I do think principle writedown would be very effective. If you could get $20 billion in a fund, you could provide half a million in very solid modifications," Zandi says.

Top Stories

The government's proposed foreclosure settlement has leaked, report Brady Dennis and Dina ElBoghdady: "Last week, state attorneys general, joined by a handful of federal agencies that included the Justice Department and the new Consumer Financial Protection Bureau, submitted a 27-page term sheet obtained by The Washington Post of proposed changes to five of the nation's largest banks as its opening bid in what is expected to be a series of intense negotiations beginning in coming days. The proposals attempt to address wide-ranging complaints about the servicing process. One would require the servicers to provide a single point of contact for borrowers looking to modify their loans. Another would require them to develop a portal that would allow borrowers to submit and track documents electronically in real time.The document also spells out the conditions under which servicers should consider principal reductions for certain borrowers...everal attorneys general acknowledged that differences of opinion remain among various stakeholders on two key issues - how to structure a feasible modification program and the precise amount of penalties that should be levied on the banks, some of which could go toward principal reductions for borrowers."

Read the draft settlement: http://tinyurl.com/4bp92je (pdf)

Read the summary from The American Banker: http://bit.ly/fIEjWB

Moderate Senate Democrats may not sign on to Harry Reid's proposed budget, report Shira Toeplitz and Scott Wong: "The Senate has yet to hold a vote on the latest budget proposals, but Majority Leader Harry Reid already has a problem on his hands with a group of politically rattled moderates. Several Democrats facing tough re-election races next year are not saying whether they will support the package of $10.5 billion in cuts backed by Democratic leaders. Key budget votes could happen as early as Tuesday. 'I feel strongly that the cuts are not large enough, but there are some cuts, so I don't know whether I'll be for it or against it,' Sen. Claire McCaskill (D-Mo.) told reporters Monday night. 'But I know it doesn't go as far as we need to go.'"

The anti-deficit 'Gang of Six' is taking their campaign public, reports Lori Montgomery: "While Washington bickers noisily over cutting a small slice of the federal budget, Sens. Mark Warner, a Virginia Democrat, and Saxby Chambliss, a Georgia Republican, launched a campaign Monday to convince the public that merely cutting spending will do little to tame the $14 trillion national debt....In addition to Chambliss and Sen. Tom Coburn (R-Okla.), who are personal friends of House Speaker John A. Boehner (R-Ohio), the Gang of Six includes Sen. Mike Crapo (R-Idaho), a close adviser to Senate Majority Leader Mitch McConnell (R-Ky.); Kent Conrad (D-N.D.), the chairman of the Senate Budget Committee; and Richard J. Durbin (D-Ill.), the No. 2 Democrat in the Senate and a close Obama ally. Warner is the former governor who famously balanced the Virginia budget....The group has been meeting weekly, while about 30 other senators are watching from the sidelines to see whether the talks produce a politically viable deficit-reduction plan they can back. "

Speaking of deficit reduction, Alan SImpson says the darndest things: http://politi.co/gNUuMg

Wisconsin's Democrats are not folding yet, reports Michael Fletcher: "A chance to end the legislative standoff that has paralyzed the Wisconsin government for weeks seemed to slip away Monday after Gov. Scott Walker (R) accused the leader of the state Senate Democrats of blocking negotiations to end the impasse. After some of the 14 Senate Democrats who fled the state to block a vote on the governor's proposal to sharply curtail collective-bargaining rights for government workers in Wisconsin signaled their possible willingness to return, Walker called a news conference at which he accused the legislators of being the biggest impediments to ending the stalemate. The governor said members of his staff seemed to be making progress in negotiations with some of the absent Democrats, only to have Senate Minority Leader Mark Miller stand in the way."

Still to come: The White House is pushing for a free-trade pact with South Korea; a group of Senators is pushing Obama to name a new Medicare administrator; the GOP needs a health-care plan -- and fast; John McCain and James Inhofe reach a deal on earmarks; Congressional Democrats want Obama to open the Strategic Petroleum Reserve; and a tiny lotis hold a tiny umbrella.

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