Banks, states reach $26 billion settlement

While today's foreclosure settlement deal is by some accounts expected to help the housing market, as the foreclosure pipeline is once again unclogged, it is unclear what this will actually do for price discovery and clearing levels when one considers the already untenable shadow housing inventory, which can be summarized simply as follows - excess supply. It is this overhang that has to clear before there is any hope for incremental demand interest. And since mortgage rates are already at record low levels, and only an MBS QE could do much to stimulate even lower rates (which has its own set of adverse consequences), it is now obvious that from a purely psychological standpoint as long as people expect rates to decline in the future, they will not commit to a new home loan today. What makes it even worse is that the excess inventory has to be literally burned to the ground for regular market clearing to resume.

Unfortunately, as the following chart from JPM shows very vividly, the burning will have a long way to go: the most recent shadow housing inventory is now at an all time high. Think today's action will do anything to help the housing market? Think again - if anything it will simply see the number of foreclosed properties explode. Rather, what it will do, is finally redirect discretionary spending from all the squatters who have lived mortgage free in their houses for years back into mandatory spending such as rent and mortgage bills. For those unclear, recall this post quantifying the benefit of the squatter economy (i.e., non paid rental/mortgage payments going into discretionary spending) - kiss that $50 billion inflow into GDP goodbye. Paradoxically, by trying to fix housing, Obama may have just popped the consumer discretionary bubble, of which the biggest beneficiary is that one certain fruit-shaped company...

More than a day after the announcement of a mammoth national mortgage servicing settlement, the actual terms of the deal still aren't public. The website created for the national settlement lists the document as "coming soon."

The implication of this is hard to say. Spokespersons for both the Iowa attorney general's office and the Department of Justice both told American Banker that the actual settlement will not be made public until it is submitted to a court. A representative for the North Carolina attorney general downplayed the significance of the document's non-final status, saying that the terms were already fixed.

Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist. Instead, there are a series of nearly-complete documents that will be attached to a consent judgment eventually filed with the court. That truly final version will include things such as servicing standards, consumer relief options, legal releases, and enforcement terms. There will likely be separate state and a federal versions of the release.

"Even once we get to the final terms, the servicers we're told are going to be allowed to develop their own plans," says NCLC's Thompson. "They're going to have three months to develop those from when the settlement is approved by the court. We are a long way in lots of ways from being able to kick the tires."