So if you have been paying attention to the news you may have noticed a settlement has been reached by the big banks and government officials regarding the robo-signing debacle. It’s being touted as the largest settlement of its kind and a huge win for homeowners and foreclosure victims across the country. However the benefit of this program I think will be very negligible and in some cases will hurt homeowners and housing markets trying to muddle their way to recovery.

Full disclosure I am focusing on the Florida market and specifically South Florida as that is where the majority of my personal experience comes from.

Now, let’s explain:

First there is the initial cash payment that will be made to homeowners that have been foreclosed upon. Approximately 750,000 people will be receiving a one-time payment 1500-2000. This which is actually being downplayed by everyone I have read is probably the best part of this settlement. Though it is not a very large sum it does provide immediate cash which will help many people cover some additional expenses and will also dump some additional money into local economies which is always a good thing. That’s really it for that. It’s not a life changing event for most people but it will be a nice thing for those who receive their check in the mail.

Now on to the second part of this program which sounds great in practice but in reality may not end up being all it’s cracked up to be. This is the mortgage reduction part of the process. The banks have committed somewhere in the area of 17 billion dollars to write down mortgages that are underwater. That sounds like a pretty big number but let’s put it in perspective. The total estimated amount that US homeowners are underwater on their mortgages is approximately 700 billion dollars. This means the banks have agreed to write down about 2.5% of the outstanding underwater debt. That’s a drop in the bucket but let’s focus on some other figures. The average payout is supposed to be around $20,000. This means approximately 850,000 homeowners will receive some kind of principal reduction again since 1 in 5 mortgages is under water this is a very small percentage. The most recent information I found says 11 millions mortgages are underwater and 3.5 million are delinquent so we are looking at about 8% or 24% depending on how you look at it.

So the thought is to say well at least they are receiving some benefits it is a good thing for those homeowners that get selected. In some cases maybe, but in many cases this will actually hurt the market and homeowners due to lack of understanding. Again focused on South Florida and the short sales we complete here at our office $20,000 is almost never enough to bring someone’s value to par. It’s a band-aid fix that is going to cause people to avoid the inevitable in hopes that they will be one of the few that actually gets help from the settlement. Most will not realize that they are only going to receive a 20,000 write down which will not truly help them. Instead of pursuing a short sale which is the best option in most cases they will wait for their write down from the bank all the while still not paying their mortgage and headed towards impending foreclosure. This hesitance will slow down the real estate market which has been surviving on distressed properties. Since they are only offering the incentive to borrowers that are delinquent this may also be a catalyst to send current borrowers into default in an effort to write down their loan.

The worst part is that the banks are incentivized as part of the agreement to help mortgage holders that are in worse condition. This is a waste and is backwards thinking. If I am 200,000 underwater on my mortgage and you write down 20,000 it doesn’t help me at all. The focus should be on those that are closer in value to actually bring the houses up to par. Allow the homes that are way underwater to short sell and reset. Instead of writing down the worst cases focus on borrowers that are struggling to remain current and would be helped by a 20,000 reduction. There is still an opportunity to make this effort work by refocusing with a strategy that props up homeowners that can actually use the help. I just hope the confusion this will surely bring does not cause many borrowers who are debating their best option wait too long and end up in foreclosure.