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Will Foreclosure Deal Hurt Homebuyers?

The government’s settlement with five banks today will provide some relief to distressed homeowners, but experts say it could be a setback for future home buyers.

The finalized agreement, which follows a yearlong push to settle allegations of foreclosure abuses by lenders, is worth up to $26 billion and will provide cash payments to borrowers who went through foreclosure over the past few years. It will also forgive some principal for borrowers who owe more on their home than it’s worth. But mortgage experts and bank sources say that in the longer term the settlement could make it harder for many Americans to get a mortgage. “It has the potential to make mortgage credit less available and expensive in the future,” says Bob Davis, executive vice president at the American Bankers Association.

Why? Some experts say the settlement raises the possibility the government may change other mortgage contracts in the future to allow other borrowers to pay back less money than they agreed initially agreed on. To make up for those losses, they say, lenders may be forced to raise costs for future borrowers. Banks are also likely to hire more personnel to avoid future abuse – including allegations that bank employees and contractors were signing off on foreclosure documents without verifying information – which experts say may also lead to more expensive mortgages.

This wouldn’t be the first time government intervention has been cited by banks as a reason for raising costs on consumers. For instance, banks have said that recent regulation like the Dodd-Frank Act — which lowered the fees they receive from retailers when consumers swipe their debit cards — forced them to charge more for checking accounts. “It’s a matter of speculation, but what banks have done so far as a result of earlier legislation is raise fees,” says Stu Feldstein, president at SMR Research, which tracks the mortgage market.

To be sure, stricter underwriting standards by Fannie Mae and Freddie Mac, as well as increased government regulation, are also driving up costs. And for consumers, mortgages were already tougher to come by. Banks have been increasing their reserves in anticipation of this settlement, says Davis, and that helped to lower credit availability during the past year and a half. By increasing reverses, banks were potentially redirecting money that could have been used to provide loans to serve instead as a cushion to pay for this settlement.

The settlement could impact more than homeowners. For instance, it may lead to lower rates on deposit accounts as banks look for ways to make up the money they’re paying out in this settlement, says Keith Gumbinger, vice president at mortgage data firm HSH Associates.

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    • The dumb masses in this country that rail against the big bad banks and cheer when the evil banks are fined or coerced by the benevolent federal government are so typical of the government school educated that never were taught that corporations do not pay taxes, fines, penalties… their customers do.
      So, yes, loans will cost more and lenders will be more stringent in their underwriting as to whom loans will be given.
      Duh!

    • Nothing wrong with making it more difficult to buy a home. If you can’t afford 20$ downpayment and the fees, then don’t buy a home. There’s plenty of rental out there waiting.

    • Initially No. Long term Yes. If you are having difficulty now getting a loan, the guidelines will be tougher later. The answer to article is this… It is like taking a bad drug that fixes one problem, but brings on many other problems. Over generalizations that all banks are evil and started the whole debacle is false. Bottom line…Everyone is to blame, but the government started the blaze and now they are using whatever extinguisher that is available to stop what they started.

    • Not only will the $26 billion deal hurt (future) home buyers, the only ones who really benefit from the bill are the banks them- selves. Desperate homeowners who need immediate help and meet the stringent criteria may qualify for up to $2,000 in assistance. The folks in trouble need more help than that–the kind of help they should have gotten before they got into their mess!

    • The president and governors sign laws that they do not read (and many have major adverse effects), should we put them in jail. A lot of the problems were caused by Congress (especially Barney Frank and Nancy Pelozi) requiring banks, including Fannie Mae and Freddy Mac) to provide up to 20% of mortgages to low income people (who couldn’t even afford a down payment). Then in 2005 These same people block legislation that attempted to put more controls on derivatives. I guess they should go to jail also.

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