The Mortgage Mess Settlement Proposal: Off to an Awful Start


Over the weekend, Bloomberg, The New York Times and The Wall Street Journal reported on a proposal for a partial settlement of the mortgage mess offered by a group of state attorneys general and federal regulators. The document apparently addresses mortgage servicing, modification and foreclosure practices, but its focus is strictly on banks’ future behaviors. A theoretical punitive bunch of fines for bank misbehaviors and a process to modify more mortgages and reduce borrowers’ principal waits in the wings.

Presumably, the logic involved in floating this proposal is similar to the methods by which prosecutors get lesser criminals to cooperate by testifying against bigger fish: The deal to reduce the otherwise-deserved penalty is based on the degree of cooperation the witness provides.

Unfortunately, the proposal as it has been described so far is a joke. The requirements for banks aren’t strong enough, and yet The Wall Street Journal refers to them as a “wish list.” All the coverage portrays the document as the starting point for “difficult” negotiations, implying that the final document will be even weaker.

For context, let’s start by looking at what the proposal reveals about how wrongheaded current bank practices are.

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