Biden: Why we settled bank mortgage suit

See UPDATE from Delaware Attorney General Beau Biden below.

EARLIER: After months of dickering, the California and New York attorneys general have joined Republican-run states in endorsing a proposed settlement to the many home-loan management complaints facing giant lenders Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, Ally Bank. Settlement details here.  WSJ reports here.

The outline of the deal: $5 billion for the states (about a third of which will be passed in $1,000-$2,000 payments to homeowners who were wrongly speed-foreclosed during the late financial crisis); plus $20 billion worth of mortgage reductions for people whose loans are now worth more than their houses. 

Pa. attorney general Linda Kelly in this statement said the state could get up to $266 million for the settlement:

- $93 million for "loan modifications and other direct relief"
- $21 million in "cash payments to Pennsylvania borrowers who suffered servicing abuse and lost their homes to foreclosure from January 1, 2008 through December 31, 2011."
- $81 million in refinanced loans to Pennsylvania homeowners who are "underwater"
- $69 million in direct payment to Kelly's office

UPDATE: Delaware has rolled over and agreed to join the settlement; its share is up to $45 million, says the state's elected attorney general, Beau Biden (his dad is Vice President).

"We were working it late into the night," Biden told me. "Based on the settlement they're going to have to do some of the principal deduction for borrowers who are hanging on by their fingernails. That's also to the benefit of the investor. And people who are underwater but on time will be able to refinance their mortgages.

"And we have maintained our investigative authority" and can keep suing and pressing banks to improve practices, for example by challenging loan servicers who "have an interest in foreclosing" instead of settling with borrowers; also in easing terms for active-duty servicemen who face foreclosure due to military assignments. (More from Biden at bottom)

Consumer advocates (like PICO Network, a church-based liberal activist group) say it's not enough: lenders need to be punished for violating due process by mass-signing loan-default paperwork without verifying its accuracy; for marketing inappropriate loans to people who can't pay them; and more.

But bank analyst Richard X. Bove in a report to clients of Rochdale Securities says today the settlement is a "Deal from Hell" because it rewards the wrong people: "The government has selected a small minority of homeowers to get this benefit" - he estimates one million. "Homeowners who made large down payments" or who committed the "terrible mistake to pay down the principal" won't get any relief. "Homeowners who made minimal or no down bayments will get the windfall benefit of a lower principal repayment or cash payment."

Here's how Bove sees this working:

- "You and I buy two exact same $200,000 houses...
- "You put 20%, or $40,000, down. I put $5,000 down...
- "You make payments on time and pay your loan down by another $10,000. I (pay down my) loan by $5,000, (then) stop making all payments.
- "The value of both homes drops by 20% - $40,000.
- "You have $10,000 in equity in the house. I am underwater by $25,000...
- Under the settlement plan, "My loan amount gets dropped by $30,000." But you have to keep paying your original loan at the old terms.
- "You used your savings to make a down payment. You made your payments regularly.
I did neither.
- "The attorneys general believe you deserve nothingI get a windfall benefit."

And banks will just pass their costs on to the public through higher fees, Bove predicts. The lesson: Deadbeats get bailouts, and "Only fools meet their financial commitments."

UPDATE: Not so, Biden told me: "I tell people who are angry about irresponsible borrowers and lenders that $3 billion of the settlement will refinance people who are underwater but paying their credits on time. And it is in everyone's interest" to keep more homeowners from going into foreclosure and cutting home values.

Will the settlement mark the bottom for home prices? Said Biden: "I hope so."