Economy Watch: Government, Banks to Ink Robo-Signing Settlement

By Dees Stribling, Contributing Editor

The federal government, various state attorneys general and the largest banks in the country have struck a deal that would specify an assortment of mild punishments for the banks’ involvement in robo-signing. A formal announcement on the deal might come as early as Thursday, according to published reports on Wednesday, with some of the larger (and more foreclosure-ridden) states such as California and Florida probably joining the settlement.

All together, the banks in question—Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., and Ally Financial Inc.—would be obliged to pony up about $25 billion for homeowner relief, provided California and Florida in fact decide to join (less if not). Some $17 billion of the total would be for loan modifications for delinquent borrowers; about $3 billion would be for refinancing for homeowners who are current on their payments but under water; and around $1.5 billion would be for direct payments of up to $2,000 each to borrowers who lost their homes through foreclosure. A remainder of about $2.5 billion would be for states, to fund housing programs.

The settlement will likely not affect the banks one iota, at least in terms of their bottom lines. Between the five, $25 billion isn’t a vast sum, but more importantly, most of the settlement costs would be expressed as accounting entries reflecting the lowered loan values for those borrowers fortunately enough to receive modifications. The markdowns have probably already been counted as expenses by the banks.

The bigger question is whether the settlement will affect the housing market. An estimated million homeowners will see their mortgage debt reduced, while another 300,000 will be able to refinance after previously being unable to. As many as 750,000 will receive the better-than-nothing $2,000 payment. Since this is an election year, the Obama administration hopes that the deal will have some positive impact on the market, but considering the government’s record in intervening in the mortgage market since the Panic of 2008, any positive for the broader mortgage market is no sure thing.

Still no Greek deal

There was still no clarity from Europe on Wednesday. Depending on the source, the deal is ready to go, nearly there or on the verge of a breakthrough—or suffering from a roadblock or a snag or a bump in the road. A few deadlines have come and gone. Meetings have been held, postponed and rescheduled.

Greece might yet be able to forestall an immediate default, but the longer-term prognosis for the country remains dire. The nation’s economy shrank by 6 percent in 2011, and unemployment officially is 18.4 percent, and unofficially much higher (the crunch is so bad that many employers can’t pay their workers regularly). According to the Foundation for Economic and Industrial Research, which does for Europe what the Conference Board does in the United States to gauge consumer confidence, fully 64 percent of the Greeks believe that the economy will get even worse in 2012.

Wall Street was gloomy at the beginning of the day on Wednesday, but recovered enough to be slightly positive by the end of the day. The Dow Jones Industrial Average was up a Lilliputian 5.75 points, or 0.04 percent, while the S&P 500 and the Nasdaq gained 0.22 percent and 0.41 percent, respectively.