Last week, we all heard about the $26 billion foreclosure settlement between the big banks and federal and state officials. Some have called it a “wrist slap” compared to the hardships faced by 4 million homeowners who have lost their homes and another 3.3 million who are in or close to foreclosure.
At best, this payout will reach about two million former and current homeowners. The banks will grant some $10 billion worth of principal reduction, $3 billion in refinancing, and $7 billion in other mortgage relief. $1.5 billion will be cash payments of roughly $2,000 to some 750,000 borrowers who were treated unfairly. Lastly, $3.5 billion will go to state and federal governments to fund the aiding and counseling of borrowers facing foreclosure.
The banks did not get a blanket relief. But, it does protect them from state and federal civil lawsuits for most foreclosure abuses, excessive late fees and conflicts of interest that caused banks to favor foreclosures over modifications. Going forward, banks will be subject to tougher rules for servicing loans and executing foreclosures.
The settlement also allows further investigation into mortgage abuses which led to the financial crisis. As President Obama outlined in the State of the Union address, he intends to expand the inquiry and produce broader accountability.
Eighty years ago, the Pecora Commission actually produced results, though appointed three years after the Wall Street crash of 1929 and the subsequent Depression. Ferdinand Pecora was appointed by the Senate committee in 1932 and received broad inquiry powers in 1933. Ultimately, his commission’s report ran thousands of pages.
Congress responded to the report by passing three major pieces of legislation. First, the Glass-Steagall Banking Act, which separated commercial and investment banking. Second, the Securities Act of 1933, which established penalties for filing false information about stock offerings. And, third, the Securities Exchange Act, which created the Securities and Exchange Commission to regulate stock exchanges. Nearly fifty years of financial stability followed.
We hope the task force appointed by President Obama is more than election maneuvering and that this is not a meaningless exercise. A modern day version of the Pecora Commission might really make a difference for the future.