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The settlement deal with five mega mortgage servicers at the national level involves $25 billion that will benefit nearly 1 million house owners. From this pot $5 billion will be in cash while $20 billion will go towards loan modifications for those borrowers who were delinquent and underwater on their housing loans.

The principal reductions will be mostly on those loans that are held by the five banks – Ally Financial, Bank of America, Citi and Wells Fargo but not on loans covered by Fannie Mae, Freddie Mac and  Federal Housing Administration.

The trio is accountable for 56% of the current housing loans. The amount of principal waiver will vary from one borrower to another; the average amount will be $20,000.

In some cases it could be bigger especially in those states that have been worst hit by the foreclosure crisis.

Economists think that a minimum of $25 billion will be required for principal reduction otherwise no dent will be made in the foreclosure crisis. Dean Gould of University of Michigan’s Law School (lecturer) said, “Principal reduction is ultimately the only way this crisis will end”.

He did not think that $10 billion was enough. He added, “There has to be a sustained programme of principal reduction for this to work”. For this to be effective will depend on whether Fannie Mae and Freddie join in to reduce principal on their loans. These government sponsored entities own half the housing loans of the country. Their regulator, FHA has spoken against principal reduction.

Alan White of Valparaiso University School of Law, an expert in the line said, “Freddie and Fannie is the other shoe that has to drop. If this works and Freddie and Fannie follow suit, we could begin to see an end to the foreclosure crisis”.

Across America there are over 11 million house owners who have gone underwater – loan due being more than worth of property as per CoreLogic.

Nearly 4 million mortgages are in some stage of foreclosure as LPS Applied Analytics.  Mark Zandi of Moody’s Analytics (economist) commented that if this settlement took out at least 500,000 from the foreclosure pit it “will be sufficient to get home prices moving north again”.

But another expert, Paul Diggle of Capital Economics referred to the principal reduction involving an amount of $10 billion as just a “drop in the ocean”. He reiterated that it would only be of marginal help but fail to better the “fragile housing recovery that appears to be underway into a significant and sustained one”.

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The recent settlement on the foreclosure crisis is focusing on solving the problem only through money. But a long lasting solution has to go beyond dollars to tackle the issues at the very heart of the catastrophe that has been totally ignored –  the design related to urban planning.

During the bubbling years the banks and the construction group pushed aside thoughts relating to thoughtful architecture in urban settings focusing on cookie-cutter units that could be quickly mimed like repackaging derivates and flipped. On the other hand architects stayed away from the mundane housing sector to pursue projects that were more prestigious.

Today suburban America is calling out for better designs. The previous residential patterns cannot meet the requirements of domestic life of today. The policy makers as well as the designers have to wake up to the fact that a single-family house is a challenge in designing having entwined elements –  architecture, finance and the desires of the residents.

Cicero III, a suburb of Chicago can be taken up as an example. Currently nearly 80% of those who reside here are Latinos – nearly half of them have been born on foreign soil. Cicero is an example of the transformation that has taken place in the suburbs – something that was not given due notice at the time of the housing bubble. The inner cities have been replaced by the suburbs as the ultimate choice for the new immigrants.

Across the country half of the Hispanics reside in the suburbs – larger numbers of the later entrants are giving it precedence over cities. The numbers of poor in the suburbs have gone up 25% because of new immigrants from 2000 to 2008. This caused regions like Cicero to be worst hit by the foreclosure crisis. In one year in 2009 there were 2,049 foreclosures; after Chicago it ranked second highest in Illinois.

Here the designer factor needs to be pointed out Most of the units in Cicero are single-family houses that are detached. These were too costly for the majority of immigrants. This led to many families (from four to six) squeezing into one house. This led to instability in financial conditions, tensions in the neighbourhoods and tumbling of property prices.

By and large we look upon these discrepancies purely from the financial angle. Alternatively if the families were not forced into these unsuitable houses but if the houses were rearranged to accommodate these families, the scenario would have been different.

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Design in urban planning has been an important factor contributing to the foreclosure crisis in suburban areas.  In finding solutions to suburban problems, the focus has been mostly on improving their financial situation and not enough on trying to reduce the number of  foreclosures.

The majority of the population in the suburbs is Latino immigrants. The houses constructed during the housing boom were mostly single-family units, which can easily be flipped. But, unfortunately, it had other consequences. Five or even six families squeezed into one house, which lead to both social and economic tensions.

Now that it has be done, what can be done about this horrible situation? Houses need to match the size of families and not the reverse. Should the present houses then be bulldozed? The answer is no. Vacant properties should be renovated in order to meet present needs and to raise property values. Cicero, a suburb of Chicago, can be held up as an example of the importance of renovating properties. Here, the problem is focused on the innumerable amount of deserted factories that are surrounding the foreclosed abandoned units.

These buildings are taboo for many developers because they are afraid of industrial contamination.  Older suburbs are peppered with abandoned units while jobs and houses are sprawling outwards from these neglected areas. But there are new techniques nowadays that can be utilized in order to address this problem. Poplar and willow trees could be planted to absorb industrial toxins and make the way clear for safer and cheaper rehabilitation.

These abandoned factories are storehouses of steel, stonework and concrete. These would translate into wealth if all the materials were recycled and used for building new work places as well as residences. Instead of forcing the residents to fit into sprawling single-family units, these very houses could be made to either expand or to shrink to fit their size.

Another problem is that, due to zoning laws, in most of these places expanding or making homes smaller is illegal. In general, rules call for segregation of residential areas from commercial and industrial areas. This leads to prohibiting expansion and reusing of building material for constructing new houses and business units.

The restrictions of mixed use of properties are extremely tight. The code in Cicero also defines a family that will exclude the groupings comprised of multiple generations – something that is common across America. This has been a thorn in the side of many urban planners for many years. Thankfully, it can be loosened in order permit new combinations.

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The ink was still wet on the pan American foreclosure settlement when word got around that many states were using the funds to bridge gaps in their budgets. Democratic Governor of Missouri Jay Nixon claimed a big slice of the money due to his state, to prevent mega cuts in expenses for universities and colleges. The Republican legislature heads have already supported the plan.

There are other politicians eyeing this largess for using it for purposes not related to the foreclosure crisis. The $25 billion deal is like a jar of water in a desert that has come in most timely when the states are facing yawning budget gaps running into multimillion dollars.

The bulk of the dollars are meant to go directly to the affected house owners but apart from that the 49 state administrations will get about $2.7 billion; the states are free to use it as they want to.

Some of the states are promising to use it for matters related to the housing crisis. Michiganhas said it will focus on helping homeless children who have been victims of the crisis. But many states are already thinking of diverting some portion of the dollars to narrowing their budget deficits; it is likely that more states will be thinking along these lines.

Consumer advocates are comparing it with 1998 when the tobacco settlement was reached. The states flushed with bonanza funds spent the money on issues that were not even remotely connected with anti-smoking measures.

The states had promised that with $206 billion that would flow in for many decades would be used to improve public health; but in practice this was not done. State spending on anti-smoking measures is lowest since 1999. Mari Cocco of Campaign for Tobacco-Free Kids said that the lesson learnt is now more vigilance is required to avoid a repeat.

Joan Bray (Democrat) a former senator and present chairperson of Consumes Council of Missouri said, “We shouldn’t be in the position of taking money that is intended to help consumers and their mortgage tribulations and putting that to another purpose”.

What will states do next month when the money flow stops? The states are more worried about today than tomorrow. The money will start flowing soon after a federal judge gives the final nod. The timing couldn’t be better as the state legislators would be blueprinting their budgets for the coming fiscal year.

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Georgia legislators are to decide if the settlement funds will be primarily used for foreclosure preventive methods or not. They have plenty of elbow room as regards using the $185 million it is scheduled to receive from the foreclosure abuse settlement.Georgia’s share is a slice from the total settlement amount of $25 billion as agreed upon by the five mega banks and the federal as well as state governments.

The amount Georgia will get is inclusive of $104 million that the state will directly receive, sans any conditions.

Those who drafted the settlement want the amount to be used for taking foreclosure preventive measures and to give a fillip to law enforcing steps to chase and punish those indulging in financial fraud. It could be used for increasing legal help, for projects to contain blight and for providing funds for training up teams that point their guns at financial cheats, as per the deal.

But the law does not mandate that the money has to be used for any specific purpose; as per the laws of Georgia it is up to the legislators to decide how the funds will be disbursed.

Sam Olens the attorney general of Gerogia said he has sent letters to the lawmakers underlining the need for the funds to be utilized for mitigating the negative effects of the foreclosure crisis although he does not have much to say about the specifics. He commented, “It’s up to the Legislature”. Till now only preliminary talks have been held by the legislators about use of the funds.

Marshall Guest the spokesperson of the Speaker of the House, David Ralston, said that no decision has yet been taken by the leaders of the chamber. The top Republicans in the Senate want to keep the money for now in the reserves and has not put forward any long-term specific plan informed Nathan Humphrey the chief-of-staff to Tommie Williams, the President of the Senate (pro tem).

The total amount of the settlement for Georgia is $814.7 million. It includes $102 million to be used for refinancing loans for some of the underwater homeowners and also $526 million to be used for modifying terms of loans.

Olens commented that this should give “partial relief” to the troubled homeowners of Georgia; however he was disappointed that it did not extend to those mortgages that were issued by the two government sponsored mortgage titans – Fannie Mae and Freddie Mac. The latter two own nearly half of all the mortgages of the country.

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The Obama government has plans of allowing refinancing of underwater homeowners who have gone underwater but are current on their mortgage dues.

Lowering the rate of interest for mortgage will hit the pockets of Fannie, Freddie and FHA –  government supported agencies. Investors and pension funds too would see their earnings go down. Anthony Sanders of George Mason University (formerly head of Deutsche Bank at New York dealing with research on securities backed by mortgages) said “So we’ll bail out people who bought a house they can’t afford but stayed with it.

They are not in jeopardy, so why are we giving them a big Christmas gift”. Why should savers be punished?

The government argues that by reducing the monthly payment amount the risk of default is also reduced. From this ultimately the taxpayers will benefit. But what are the real causes of default? These are unemployment, staggering medical expenses, divorce etc. The reducing of monthly payments will not be of help in these cases said Sanders.

Professor Emeritus Ken Scott of Stanford University (law and business) said that the bulk of delinquencies came from the sub-prime mortgages that were contracted during 2004-2007. These loans were granted to those with poor credit.

Attempts at restructuring these loans, actually means giving “gifts to the borrower of some amount of money on the thought that, having forgiven some chunk of the debt, they’ll be able to pay what’s left”. But despite this the default rate on these types of modifications has gone up to 40% – a high proportion.

Who is going to shoulder the losses of the foreclosure crisis? The sub-prime borrowers who made negligible down payments and have lived without paying anything even as rent during the long period of foreclosure have really lost very little.

But other foreclosing lenders have to sell off their properties suffering losses; on top of this they have to bear the expenses pertaining to taxes, eviction, and maintenance for many months. Scott observed, “Who bears that loss? If the loss is still on the books of the lender, the lender. If it’s on the books of Fannie Mae and Freddie Mac, the taxpayer, because we are now underwriting all their losses”.

Who suffers the loss depends on who is holding the bag last. The loss is the homeowners if he or she continues to pay the mortgage. It’s the bank’s loss if it takes back the house from the defaulter. It could be the loss of the investor who has bought the securities backed by mortgages. The answer is pretty clear cut and straight.

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Washington goes into a mood of denial, refusing to see the impending danger from the continuing foreclosure crisis. The media has failed to focus on an important event – the sending of a memo by the Federal Reserve to Congress committees overseeing the financial segment carrying a message of warning. The action is extraordinary as the note came without any prompting.

The note stated that the housing market is challenged by excess supply, losses from inept foreclosures and absence of constructive policies that are causing property value to further tumble; it is dragging the broader economy preventing strong recovery.

The concerns of Bernanke have been echoed by three other three top officials of the Fed – presidents of Fed banks of Boston and New York and Federal Governor Betsy Drake.  The president of New York Fed, William Dudley said, “The ongoing weakness in housing has made it more difficult to achieve a vigorous economy recovery”.

There are many indications that the present policies pursued in the housing sector will at the least put brakes on an economic recovery and at the most lead to dangerous consequences that will impact not only on the financial segment but also on the well being of the middle class.

The zombie banks have performed poorly while the government has been trying to cover up these faults. This has inevitably led to the failure of the housing programmes initiated by Washington. The programmes relied on voluntary support of financial entities who know nothing but the lining of their own pockets.

The national economy depends 70% on consumer spending and this is the vital part for any recovery. To garner sufficient demand the middle class should have money in their purses plus there has to be spending by the top 1% sitting on wealth. The report of the Fed suggests that the housing crisis is unlikely to recover.

The report stated that over $7 million of equity on residences has vanished. This is over half of what the amount was during the early part of 2006.

It noted, “This substantial blow to household wealth has significantly weakened household spending and consumer confidence” The worst affected has been the middle-class because for them the house is the prime source of wealth. The lower income group is not likely to be homeowners while the upper income group has other types of wealth like businesses and financial assets.

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The Blacks have been worst hit by the foreclosure crisis. Many accusing fingers point at Community Reinvestment Act (CRA) that bans any form of redlining. The CRA stipulates that financial institutions find out and accordingly respond to the credit requirements of all in the regions within their jurisdiction, including those in the low to middle-income group. Accordingly they mandated to resort to sound lending practices that are safe.

According to Federal Reserve a mere 6% of highly toxic sub-prime loans made to those in the low to middle-income group originated from lenders that came under CRA. The bulk of these loans were contracted by financial institutions not covered by this law.

According to Center for Responsible Lending nearly 8% of the Blacks and Hispanics have seen their homes swallowed by foreclosure; in comparison 4.5% Whites have been affected. As per the estimates of United for a Fair Economy one third of Black families and 40% of the Hispanics are facing the danger from sliding down from the middle-class to the poor category because of the foreclosure triggered economic crisis.

Why was there this concentration of toxic loans and subsequent foreclosures in areas resided by the minorities? In Louisville at least the blame lies with the investors – primarily white speculators. They did not reside in these localities.

Research conducted by John Gilderbloom and Gregory Squires has found that in each of the years of 2007 and 2008 there were 2,000 foreclosure auctions. It measured to 39 foreclosures per census tract resided by Blacks and 20 resided by Whites.

In the Black area the count was 15 units owned by the investors experienced foreclosure while in the White area it was 2 units. Most of the foreclosed houses in Black localities were owned by Whites who resided far away from these places.

In Black areas the culprits were mostly the White investors seeking quick profits. Louisville is not the exception but rather the rule. It stands right in the middle of the chaos. It ranks 103 among 203 metro regions in recent foreclosure ratings.

There are many factors behind why a property is foreclosed upon and why the rates differ from one region to another; race is one of the reasons but not the only one.  The other variables that fuel foreclosure – crime, property values, family earnings, levels of income, vacancies and toxic loan numbers, are the same for all communities, White or Black. But where the investor factor was isolated race did play an important part.

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One section of the Justice Department that monitors bankruptcy cases in courts is known as U.S. Trustees Program. In its annual report of 2010 noted that the mortgage servicing problems were all pervasive and long standing. These were not just technical but result in causing “real harm to homeowners in bankruptcy”.

The Trustee Program has accused the banks of falsifying affidavits by stating that the house owners owe them fees for some services that they never provided; the amount that the borrowers owed to the banks was inflated.

Professor Daniel Richman dealing with criminal law, of Columbia University Law School was formerly a federal prosecutor. He said the pivotal issue was who would be the targets of criminal investigation by the prosecutors.

Richman explained that a good number of workers who under the orders from supervisors churned out large number of affidavits could be sitting ducks. But that would not be worth the effort. Perhaps criminal investigations are necessary but it would be difficult to bring them against particular individuals who actually did the string pulling.

In 2010 October the Congress put pressure on the Justice Department to go ahead with investigations about foreclosure fraud. Eric Holder, the Attorney General said that it would be best to leave the matter to states with Justice Department’s help.

The OCC hastily came to a settlement with fourteen mega servicers to bring about operational changes and suggest compensation for those house owners who had been harmed.

The settlement leaves the banks to select their own agencies to determine who has been harmed and by how much. The arrangement has come in for harsh criticism from legislators and housing advocates for obvious reasons; the reviewing agencies would get their payments from the banks.

Since the eruption of the robo-signing scandal the Justice Department’s civil section has been working with a wobbly coalition comprising of all the fifty states seeking a settlement with the five mega banks that are also the biggest loan servicers. The settlement is leading towards a $20 billion (or maybe more) payment as penalties – a fraction of which would go towards paying the wronged house owners.

Law enforcement by the federal government has been practically non-existent even in those regions that have been decimated by the foreclosure crisis like Las Vegas.

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The Federal law is there but enforcement? It does not exist, even in those area worst hit by the foreclosure crisis like Las Vegas. Last year in 2010 the FBI downed shutters on the office of its task force dealing with mortgage fraud. It had been focusing on petty swindlers.

Tim Gallagher of the financial crimes division of FBI (chief) said that the agents have been transferred to attend to other operations. Many states like Massachusetts, Delaware, California and New York have become frustrated and impatient with the absence of prosecution by federal agents. It has started to investigate the lapses of the banks on its own.

Last November Nevada was the first among the states to file criminal lawsuit against a financial entity. The attorney general indicted two executives of Lender Processing Services (606-count). They were charged with paying notaries of Nevada for forging their signatures and falsely notarizing these on default notices and documents that are mandatory as per Nevada State laws. The officials of the state informed that more indictments are expected.

John Kelleher, the chief deputy A.G. of Nevada said that the investigations were kicked off following complaints by citizens. He said they became concerned and then later shocked at the sheer volume of these forged documents filed with the recorder of the county.

Investigations dug up “tens of thousands’ of dubitable records that had been filed on the behalf of mega mortgage servicers. The two executives are contending that they are not guilty. LPS in a press release admitted to flaws in some of the documents but “these documents were properly authorized and their recording did not result in any wrongful foreclosure”.

Traditionally the office of the U.S. Attorney has filed the majority of cases against the big brass in the financial world. But it has failed to bring any criminal cases relating to foreclosures abuses involving any Wall Street giant.  Till now the only step that it has publicly taken was last October when it reached a settlement (civil) with the biggest law firm of the state – that of Steven J. Baum of Buffalo.

It had handled 40% of all the foreclosure cases in New York recently representing the bankers and servicers. The records of the court show that the judges were angry with the firm for submitting false statements and posting dubitable documents.

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