The Economics of the Proposed Mortgage Servicer Settlement
31 Pages Posted: 10 May 2011
Date Written: May 6, 2011
On March 4, 2011, the New York Times described a settlement ("settlement") proposed by a consortium of state attorneys general (AGs) to large mortgage servicers. The claims to be settled reportedly relate to failures to follow existing procedural rules relating to the foreclosure process. The settlement would make dramatic changes in those rules, and reportedly require a mortgage loan principal reduction program of $20 to 25 billion. The purpose of this study is to review how such a settlement would affect the housing market and the larger economy.
We find that the proposed settlement would generate significant unintended negative consequences for housing and financial markets. In particular, we find that (1) the settlement is unlikely to provide broad or lasting benefits; (2) the settlement would be counterproductive in its overall effect because it would drive up the number of defaults and servicing costs; (3) the proposal would slow new home construction and consumer spending, and reduce access to credit; and (4) the increased costs imposed by the settlement, under some assumptions, could increase mortgage interest rates by 22 to 31 basis points per year. In light of all of these considerations, we conclude that the settlement would serve to extend, rather than end, the foreclosure crisis.
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