Robo-Signing Settlement vs Godzilla

The housing market has its own  Godzilla in the form of basic economics of supply and demand.

When artificial props entered the United States housing market,  in the form of sub-prime mortgages, abuse of stated income, zero down loans, and other creative products,   a financial  “Godzilla” appeared on the horizon.   Massive carnage was destined to come.

Come it has.

Prices have been falling since late 2006, and CoreLogic just released their report for 2011 that prices fell another 4.7%.  This is in line with our 2011 predictions that, in spite of a prediction of a bottom by some housing experts,  prices have more downside - and will continue to slide until natural market forces take hold.

As we predicted in our forecast for the housing market in 2012, a deal has been struck between the state AGs and banks over the “Robo Signing”  drama.    So how will the settlement affect the housing market?

Some say this represents a first step in attacking the 700 billion dollars-worth of underwater mortgages by reducing principle.   Let’s take a look at this logic.

Here are the main points of the deal:

1. The deal could rise to 30 billion from the current number of 26 billion if nine other servicers join the settlement.  
2. Five billion dollars of that amount will be paid out to American citizens who were affected by the robo signing scandal in a form of a $2,000 check. 
3. In an attempt to attack the 700 Billions dollar problem of underwaer mortgages. Ten Billion dollars will go to reducing principle for those who are either delinquent or at risk of default.  This equates to $17,000 -20,000 dollars of principal writedown per person.Five years from now,  it  will be interesting to if any of the home owners who receive this writedown were ultimately able to keep their homes.
4. Three billion dollars will be used to refinance mortgages holders whose homes are underwater.
5. Seven billion will go into items such as short sale and transactional  assistance, forbearance for unemployed borrowers, anti-blight programs and benefits for service members who are forced to sell their homes at a loss              

These items will give some assistance to those who qualify for this settlement.  But will these actions do much to help stabilize home prices?   No,  they won’t.  These steps will deliver about the same amount of punch as did the little tanks, planes and bullets brought to bear against Godzilla in his rampage.

The size and magnitude of our housing crisis has to be respected by all parties in order to grasp what must be done to conquer its swath of destruction.

To date, government has enacted a homebuyer tax credit,  spent trillions of dollars to bring mortgage rates down,  implemented various refinance plans,  and  made many attempts to modify troubled mortgages.   Did these actions stop the slide of prices?

No, they did not.

Will these new plans being rolled out in 2012 stop the slide and defeat our housing Godzilla?

This is unlikely.

Godzilla is only defeated when legitimate and adequate demand appears,  in the form of sensibly qualified homebuyers,  to absorb the true supply still hidden in the shadows.   When that time comes,  the monster will be defeated and the housing bulls will be safe once more.

Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgages services for California residents since 1988.