While today's foreclosure settlement deal is by some accounts expected to help the housing market, as the foreclosure pipeline is once again unclogged, it is unclear what this will actually do for price discovery and clearing levels when one considers the already untenable shadow housing inventory, which can be summarized simply as follows - excess supply. It is this overhang that has to clear before there is any hope for incremental demand interest. And since mortgage rates are already at record low levels, and only an MBS QE could do much to stimulate even lower rates (which has its own set of adverse consequences), it is now obvious that from a purely psychological standpoint as long as people expect rates to decline in the future, they will not commit to a new home loan today. What makes it even worse is that the excess inventory has to be literally burned to the ground for regular market clearing to resume. Unfortunately, as the following chart from JPM shows very vividly, the burning will have a long way to go: the most recent shadow housing inventory is now at an all time high. Think today's action will do anything to help the housing market? Think again - if anything it will simply see the number of foreclosed properties explode. Rather, what it will do, is finally redirect discretionary spending from all the squatters who have lived mortgage free in their houses for years back into mandatory spending such as rent and mortgage bills. For those unclear, recall this post quantifying the benefit of the squatter economy (i.e., non paid rental/mortgage payments going into discretionary spending) - kiss that $50 billion inflow into GDP goodbye. Paradoxically, by trying to fix housing, Obama may have just popped the consumer discretionary bubble, of which the biggest beneficiary is that one certain fruit-shaped company...[Chart follows]

The Obama administration announced on Thursday a settlement between five major banks and the federal and state governments over massive fraud relating to home foreclosures. The terms of the agreement are entirely favorable to the banks, while doing little or nothing to aid the millions of people who have been devastated by the collapse of the US housing market.
Government officials reported that the final deal is valued at about $25 billion spread out over a multi-year period. This is a paltry sum in relationship to the extent of the housing crisis, the profits of the banks and the scale of corporate criminality. However, only a small portion of this would come from direct financial sanctions on the banks.
Forty-nine of the 50 US states signed on to the settlement with the five banks—JPMorgan Chase, Wells Fargo, Citigroup, Bank of America (which bought mortgage firm Countrywide), and Ally Financial Inc. (formerly GMAC, the financial arm of General Motors). These five banks involved had net profits of $46 billion last year alone.[The 50th state is Oklahoma, which has already reached a separate settlement]
In exchange for the settlement, the banks will be released from liability for fraudulent and likely criminal activities. This includes “robo-signing,” in which the banks had employees sign hundreds of thousands of legal foreclosure documents without any knowledge of the underlying mortgages. Banks were also involved in forging documents. The true extent of the illegal operations is not known, and keeping this information secret is one of the aims of the settlement.......
Of particular importance for Bank of America is the fact that the settlement will end a lawsuit filed by Nevada and Arizona over allegations that the bank has been deceiving homeowners seeking to participate in a refinancing program.
Only about $5 billion of the settlement will take the form of direct payments, including, according to government officials, a payment of about $2,000 to some individuals who had their homes foreclosed between September 2008 and December 2011.
Despite the evidence of fraud, no one will get their home back. Since 2007, there have been some 4 million home foreclosures.
About $17 billion will come from the modification of existing loans, spaced over a three-year time period. Details are still emerging, but it is evident that decisions on what loans to modify will be left to the banks themselves. Many of the loans have already been packaged off and sold to investors (“securitized”), thus minimizing the impact on bank assets.
The $17 billion in loan modifications is a tiny fraction of the total negative equity (the value of loans in relation to the value of the underling houses) of $700 billion to $750 billion. The deal will affect less than 10 percent of US homeowners who are “under water.”
An additional $3 billion is to come in the form of mortgage refinancing, again left to the discretion of the banks.
The banks will be tasked with self-reporting their actions. The industry and the state attorneys general selected North Carolina banking commissioner Joseph Smith to “oversee” the agreement and determine whether the banks are in compliance based on the bank reports. Smith is a former bank lawyer with close ties to the industry.
Markets reacted enthusiastically to the terms and bank stocks rose Thursday.....
Perversely, the deal will likely lead to a surge in home foreclosures, with banks now confident that they can proceed with business as usual. Bloomberg News commented, “Lenders slowed the pace of foreclosures as they negotiated with attorneys general in all 50 states for more than a year… With today’s agreement, banks are likely to resume property seizures.” Increased foreclosures will also lead to a further fall in home prices.

Earlier this month, the White House announced that it reached an agreement with the five biggest US banks to settle lawsuits alleging that they forged mortgage documents in their rush to foreclose homes.
On paper, the banks agreed to pay a $5.9 billion cash payment to homeowners, and make mortgage modifications totaling $25 billion, in exchange for blanket immunity from further prosecution.
But last week, Shahien Nasiripour of the Financial Times reported that much of the $25 billion would in fact be subsidized by taxpayers through an earlier mortgage modification program.
Conveniently for the banks, the settlement comes less than one month after this program, called the Home Affordable Modification Program (HAMP), tripled its subsidy to banks for lowering the principal on mortgages.
This means that taxpayers will be funding up to 63 percent of the $25 billion in mortgage modifications promised by the five banks.
Even without the government’s subsidies, the write-downs are often in the banks’ interests, as they prevent costly home repossessions and keep borrowers paying their monthly mortgages.
Thus, far from punishing the banks for their violations of securities law, the settlement is merely another means of handing taxpayer funds to the biggest banks.
Neil Barofsky, the former Special Inspector General of the Troubled Asset Relief Program, called the revelation “scandalous” in an interview with the Financial Times last week, saying, “It turns the notion that this is about justice and accountability on its head.”.........
Despite the flagrancy of the revelation, the news went largely unreported in the US media, with neither the New York Times nor Wall Street Journal carrying the story.........
The Home Affordable Modification Program was created in 2009 as part of the bank bailout, nominally aiming to prevent foreclosures by lowering borrowers’ monthly payments.
The White House claimed that the program would keep four million people out of foreclosure. But so far only 750,000 homeowners have received permanent mortgage modifications. Of these, only 36,000 have had their principal lowered, with the vast majority of settlements leaving the amount that borrowers actually owe unchanged.........
The proposed plan to have the government subsidize the bank “settlement” would kill two birds with one stone. Obama could claim that his mortgage modification program has helped millions of people, and while publicly chastising the banks, let them get away scot-free with fraud and unlawfully evicting hundreds of thousands of homeowners.