California Pulls Out of Bank Settlement Talks, Citing Need for Bigger Bailout

One of the bigger stories on the national scene last weekend was the announcement by California's Attorney General, Kamala Harris, that the Golden State has pulled out of negotiations toward a 50-state settlement with America's largest mortgage lenders over foreclosure practices in the ongoing housing crisis. Without California's involvement, the talks (and the 11 months of work that went into them) are expected to fall apart. Harris's biggest problem with the settlement, which had been widely reported at about $20 billion, is apparently that it's too small. In a letter to Associate U.S. AG Thomas Perrelli and Iowa AG Tom Miller, Harris wrote, "(The) relief contemplated would allow too few California homeowners to stay in their homes."

Advocates of a much larger settlement will cite statistics about how a slice of $20 billion wouldn't make a dent in the problems of California's homeowners, over 2 million of whom are either underwater on their loans or facing foreclosure. But that would miss the point by a wide mark. To us, there are only two questions here that need an answer. First, is it a good idea to bail out every one of those two-million-plus homeowners, either through a settlement check or a government-mandated reduction in loan principal? And second, how likely is it that Harris's actions will help any of those people?

First off, much of the legal action being directed against mortgage lenders is driven by the same sort of empty-headed, incoherent populism we see on display in the "Occupy Wall Street" protests: people going through tough times need a scapegoat, and politicians and class warriors (insofar as they're distinguishable) are more than happy to take advantage of them for their own reasons. Given how easy it used to be to get credit for home loans, and how many people we knew in southern California who got in over their heads a few years ago (either by trying to buy and flip several properties at once, or by taking on absurd amounts of debt to own the home of their dreams), we're not convinced that many of these homeowners were actually defrauded by their lender. Most of these people entered willingly into a business deal that happened to blow up in their faces, and by right they should have to take a loss on it. Make no mistake: mortgage lenders don't make money by foreclosing, and will almost always work with the homeowner to avoid it. Forcing lenders to recoup the losses of borrowers, and to weaken their own financial position, will only make them less likely to lend in the future, which is a problem if you're hoping for any sort of recovery in the housing market. Even worse, it effectively rewards the kind of disastrous decision-making that created the crisis in the first place.

And second, can we dispense with the ludicrous idea that Harris is interested in helping California homeowners? We have to guess that the attorneys general of broke states like ours view the mortgage settlement a lot like they looked at the Master Settlement with the tobacco industry in the 1990s. The tobacco money, you might recall, soon turned into a slush fund that state governments would shift around to whatever purpose they desired. In other words, California wants a bailout to help fix its shaky finances, and if its independent action against the banks is successful, that's where the money will go.