U.S. foreclosure settlement doesn’t provide enough punishment for banks, relief for homeowners

Intended to simultaneously punish banks for their foreclosure practice and help American homeowners in distress, the $25 billion federal foreclosure settlement contains significant elements that reward banks for standard practices and do nothing to alleviate troubled homeowners, according to the New York Times.

The settlement stipulates that banks give at least $17 billion to help borrowers who have “the intent and ability” to stay in their homes. But more than $2 billion of that obligation can be met by donating or demolished abandoned homes and $1 billion more can be used to help foreclosed families move out. In fact, only $10.2 billion must be used for principal reductions to underwater borrowers.

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The Times said officials who outlined the settlement say it wasn’t only meant to prevent foreclosure but also to reduce large inventories of homes in limbo that depress property values. The measure being taken outside of principal reductions help neighbors who were affected by a weakened housing market brought about by improper loan servicing.

But Moody’s analysts doubt very many homeowners will be helped by principal reductions in a meaningful way, according to the Times, and by giving banks credit for practices that are already routine, the settlement doesn’t have the “bite” initial headlines suggested. [NYT]