After more than a year of negotiations, the settlement between state attorneys general and the biggest banks that service mortgages has been filed in federal court. The $26 billion deal, which was announced with much fanfare last month, requires five banks to reduce by $10 billion the principal that borrowers owe on underwater homes — properties worth less than what’s owed on the mortgage.

Occupy San Francisco demonstration, Oct 2011 (Paul Lancour/KQED)

It’s the largest settlement involving a single industry since the 1990s multistate suit against tobacco companies, and the Justice Department has advertised it as “the largest federal-state civil settlement ever obtained.”

Last year California Attorney General Kamala Harris temporarily pulled out of negotiations. In February, she said the original “offer on the table was simply inadequate and insufficient.” Touting the final settlement, she said “we were very determined to make sure that California, the hardest hit in the country, would receive its fair share.” The state has seven of the nation’s 10 hardest-hit cities. The final deal should deliver $18 billion to the state’s homeowners over three years.

But, some critics say, the big deal is really not so big, relative to the problem it attempts to address.

“Certainly this isn’t going to have a huge impact on that aggregate level,” says Ted Gayer, senior fellow at the Brookings Institution. “I don’t know that it was meant to.” Relying on different government and industry sources, Gayer estimates that of 11.1 million underwater borrowers, only a half-million are eligible. (See this chart for Gayer’s analyis of what type of borrowers will qualify for help under the settlement.)

He describes the settlement as a sort of bookkeeping exercise for the banks. “They’ve known all along that these [loans] aren’t worth their face value. And so now they’re acknowledging it.”

Five banks are part of the settlement – Ally Financial, Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo. According to Jed Kolko, a senior economist at the online real estate company Tulia, those banks have much to gain from coming to terms.

“Banks always want certainty, and this settlement gives them certainty.”

The robo-signing scandal –- in which mortgage industry employees didn’t read documents they signed and used forged signatures on them –- prompted the government action. This deal closes the door on certain lawsuits associated with that scandal.

During the negotiations, banks had to halt many foreclosures; Kolko forecasts they will now spike.

As previously announced, loans held by government-controlled Fannie Mae or Freddie Mac — about half of all existing loans underwater — will not qualify for principal writedowns.

Critics Say Mortgage Settlement Not Such a Big Deal 13 March,2012Aarti Shahani

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