Business analyst Mark Lacter joins KPCC once a week for an in-depth look at economic issues in Southern California.
Hosted by Steve Julian and Mark Lacter
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Mortgage settlement

KPCC's business analyst Mark Lacter talks about how the mortgage settlement will help out the housing market in California.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, how much does the mortgage settlement help the housing market?

Mark Lacter: I’d call the settlement imperfect but acceptable, Steve. Imperfect for lots of reasons, not the least of which is that the size of the agreement is close to $40 billion and there’s $700 billion worth of underwater mortgage debt in the U.S. That represents money owed on mortgages that's greater than what the homes are worth. Also keep in mind that the mechanics of the deal - stuff like payments, loan modifications, refinancing - all that has yet to be sorted out, and that could drag out for many months. Until then, it's unclear which homeowners get relief and which won't.

Julian: So what do you like about it?

Lacter: Well, it comes as a good time –lenders seem to have finally figured out how to delineate between the people who can afford to stay in their homes with some help and those who are basically beyond help. And that could lead to faster decision-making and at some point a more stable lending climate. This compares with right after the meltdown, when most lenders had no idea of how to deal with modifications and other mortgage adjustments. They were in the business of collecting mortgage checks each month, and not much else. That’s changed.

Julian: They also have been known to make big promises that have not come to pass.

Lacter: Yeah, good example is the agreement worked out by Countrywide Financial over predatory lending practices. Countrywide promised to provide billions of dollars in loan relief to borrowers, but many aspects of the agreement were not followed through, at least according to a suit filed by the state of Nevada (the charges were denied by Bank of America, which bought Countrywide). But this recent settlement has gotten so much attention that it’ll be hard for them not to follow through, although I’m sure there will be more skirmishes with the states.

Julian: Plus, California gets a huge share of the settlement.

Lacter: That's a function of the severity of the state's housing crisis - as well the leverage that Attorney General Kamala Harris was able to wield when she dropped out of the negotiations last fall. Without California, this wouldn't have been much of deal.

Julian: Apart from the settlement, is housing in a turnaround mode?

Lacter; Not so much as of the December sales data, which is the latest we have. But there have been some encouraging signs recently, and if the economy continues to improve over the next two or three months, even marginally, it's a pretty good bet that more people are going to want to buy homes. Remember, there are lots of potential buyers out there who have been holding off because of concerns about keeping their jobs, and sooner or later, they're going to take the plunge.

Julian: As for lenders?

Lacter: Well, there are signs that they want to start clearing out the old mortgages. And to an increasing degree they’re doing that through short sales, which is when the lender accepts less than the full amount owed on the mortgage. Up to now, lenders have been reluctant to do short sales because it means they're stuck taking a loss, but apparently they've decided it's a better alternative than a foreclosure (basically, it takes less time and it preserves more of a home's value). And short sales are up in Southern California.

Julian: If short sales go up, I imagine prices don't.

Lacter: Right... short sales aren't very good for prices because people are buying properties for less than what they had been worth. And that's not great considering how far prices have fallen since the recession. But sales and prices often don’t work in lockstep during a recovery. Actually, it could be years before all the losses were made up. Of course, you have to start somewhere.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA