Cleaning up the mortgage mess

Today's $26 billion settlement between the government and five of the nation's biggest banks could free up the billions in mortgage securities they possess. But the settlement will also change many of the ways banks deal with foreclosures.

Kai Ryssdal: News, of course, is nothing without context. Especially a $25 billion financial settlement that took more than a year to negotiate.

So we've got our New York bureau chief Heidi Moore with us live to contextualize. Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So, Stacey was talking about the consumers and the borrowers. Talk to me about the banks for a second. What does this deal mean?

Moore: Sure. Financially, it actually means really little to them. The banks only have to cough up about $5 billion at first, which for them is tiny. They get through that by lunchtime. And basically, the big benefit is that now they have one less thing to worry about when they're cleaning up the mortgage mess.

Ryssdal: Talk to me about that for a second: Where are we in the clean-up of the mortgage mess?

Moore: Basically the banks have so much stuff to clean up, that it's almost like that show "Hoarders" -- have you ever seen that?

Ryssdal: Yeah, I have. It's actually quite scary, but you know.

Moore: Yeah exactly, where people accumulate junk for years and years. Well, it's maybe not as scary as banking, but very much banks are like mortgage hoarders. They get sentimental about money, so they've been hanging on to billions of these mortgage securities, and for the past few years, they've had to own and manage actual houses. So I asked Michael Yoshikami how long all of this would take. He's an investor in Citigroup, and here's how he described how long it would take banks to work through the backlog of mortgages and houses.

Michael Yoshikami: Banks still have massive inventory of property, so banks really are going to have to work off this real estate excess probably for another five years.

Right, and the banks don't even want any more foreclosures -- they don't want to manage the houses.

Ryssdal: Right, that's a great point that the banks are actually in the real estate business now, which is kind of crazy. So this deal has been such a long time in coming -- are things going to change?

Moore: Well, one thing that's going to change, which is the Department of Justice is looking at mortgages, so we know it's going to get bigger. But let's change the tenses -- things are changing. So there are benefits to people who aren't even in this deal. One of them is the banks have to be more responsible about pursuing foreclosures. They have to do them one by one, not all in a giant group like they've been doing. And they actually have to communicate with anyone who's delinquent, and they have to modify those loans more quickly. And they have to make the whole process move more slowly. So that's progress for anybody facing foreclosure. And now we have it in writing.

Ryssdal: I hesitate to ask what's now on my mind, but I'm going to anyway, because it's kind of relevant: Have the banks learned their lesson? Will things actually change? You say they're changing, but come on.

Moore: Yeah, well the banks have learned how to write a big check, but I feel like they already knew that.

Ryssdal: One more thing I want to know before we go, actually, is what's the next step? There's talk now of a deal with nine more smaller banks that have another huge percentage of the housing market. We're not done with this thing yet.

Moore: No, not by a longshot. All the attorneys general can still pursue more action against all of the banks, and especially in the case of the most powerful one -- the New York state attorney general -- he's going to do it.

Ryssdal: Yeah, also just for trivia's sake: So this was a 49-state deal? Who didn't sign?

Moore: Oklahoma.

Ryssdal: Oklahoma, there you go. You win our prize. Heidi Moore, live in New York with us. Thanks Heidi.

Moore: Thank you Kai.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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