The Lays Potato Chip Mortgage Settlement Theory

Mar 12, 2012Matt Stoller

An initial read through of the settlement documents shows that it's incoherent.

I've read some of the mortgage settlement documents (read them here). Rather than diving into the details, here's what I've taken away on a broader level. I'll have more soon.

1) The administration doesn't think the size of the settlement matters. Shaun Donovan believes that the settlement will force banks to write down a few mortgages. Once they do, like a Lays potato chip, they won't be able to stop at just one.

The deal still provides the largest mandatory principal reduction in the financial crisis to date. Shaun Donovan, the secretary of the Department of Housing and Urban Development, said officials made that push because they believed breaking through the industry's "aversion to principal reduction" could be "truly catalytic" in addressing how banks modify mortgages.

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2) Beyond that, there is no coherent organizing principle behind the deal. It's not like you can explain this as "we're going to write down debts for people who can't pay them and foreclose on those that can't pay anything," or "we're going to foreclose on people who aren't paying their debts, period," or "we're going to force the banks to stop using accounting fraud." It's a mish-mash of claims and releases, some of which seem to contradict each other. Some of the signature lines are left blank. If this doesn't become a "catalytic" event, and banks don't write down debts after the credits run out, oh well. Get ready for a policy and legal mess on top of a housing market that is in and of itself a policy and legal mess. There is precedent for a deal like this: the alphabet soup of housing programs from the Bush and Obama administrations.

3) There is a provision in there to incentivize banks to do more principal forgiveness within the next 12 months. That's a reelection provision.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

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