The Mortgage Settlement: All Bark But No Bite

October 23, 2012 J

By Jason Hughey

Back in February, news of the $25 billion mortgage settlement sent mixed signals.  Some thought that it fairly punished the big banks for their alleged role in the 2008 financial collapse while others counted that the settlement didn’t go far enough.  In reality, both sides overlooked the fact that using government to punish the banks for their financial practices during the housing bubble would do nothing to help the banking industry recover.  Moreover, both sides failed to see that there was potential for corruption and abuse with regard to how the $25 billion would be allocated and distributed.

Eight months later, we are reminded of these failures of the mortgage settlement by the arrival of a report by Enterprise Community Partners.  Under the terms of the settlement, the report points out that $2.5 billion was to be used by the District of Columbia and the state governments to “help prevent foreclosures, stabilize communities, and prevent or prosecute financial fraud.”

However, out of the almost $2 billion that has been appropriated by the states, less than half ($966 million) has been used for these purposes.  Meanwhile, $988 million has been redirected into the states’ general funds to cover normal budgetary matters.  Ultimately, this should not surprise anyone considering that there were no incentives built into the settlement to ensure that the states would use the money as it was intended.

The $2.5 billion allocated to the states through the mortgage settlement agreement, essentially functioned as a bailout for the states paid for by the big banks.  The real outrage over this issue is not in the fact that the states misused their settlement money, but that they were even given the opportunity to misuse their settlement money.

The banking sector in the United States took a major hit in 2008.  Initially this was due to the economic losses suffered by the financial crash.  However, with the inquisition against banking imposed by the Dodd-Frank law, the creation of the Consumer Financial Protection Bureau (CFPB), and the mortgage settlement, it’s clear that banking in the United States faces a scary future of regulation and high costs with the government second-guessing every decision.  This won’t just impact the banks, but it will turn around and ultimately hit consumers worst of all.  Imposing costs on banks, like making them pay for damages based on past financial practices, ultimately get borne by the consumer if they mount up quickly enough.

It’s bad enough that the states have misappropriated the mortgage settlement money that they received, but the fact that it was even awarded in the first place should cause us to question the mindset that forces banks (and consequently, the consumers) whenever economic troubles come upon us.

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