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Mortgage Deal is No Silver Bullet

Dr. John Hilston

March 6, 2012, Brevard County FL - For the first time since 2009, Florida’s statewide unemployment rate has dipped below 10 percent.

The federal government and 49 state attorneys general have also announced a mortgage servicing settlement with the nation's five largest banks.

The deal will provide as much as $25 billion in relief to distressed borrowers and direct payments to states and the federal government.

The banks involved are Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo.

Despite that double-dose of good news, the economy still has major challenges to overcome.

In Brevard County, one in every 302 housing units received a foreclosure filing in January. And the construction industry, which consists of many small businesses, is still struggling.

Nonetheless, the mortgage deal reduces uncertainty in the banking sector.

While accountability for bad behavior is important, it's really not in anyone's interest to hammer the banking industry. After all, we need healthy banks to lend money to get the economy moving again and provide for sustained growth.

Here's something else to consider - any cost that banks incur as part of the settlement is bound to impact prices for everyone.

Some have suggested the settlement amounts to another bailout of the banking industry. I agree, but only to a point.

The banks are buying a get out of jail free card, so it's costing them something. Some irresponsible homeowners also are getting a bailout while responsible homeowners and the smaller banks get nothing.

My economic concern is that if the market is artificially pushed in this way, it will dampen the value of all our homes for a longer period. Here's why:

If underwater homes are pushed into the market at an even faster clip, the supply of homes will increase at a faster rate than the demand. Wasn't our main problem one of oversupply in the first place?

I'd hate to see the government "manage" us into another housing slump like the Federal Reserve did last time.

And what about the massive amount of paperwork required to close – or foreclose – a mortgage? I'd rather see a government-private partnership to streamline this process. This would be especially helpful to realtors – many of whom are small business people – and the smaller banks.

It took us a long time to get into this mess and it will take more time to get out of it, especially in Florida where the housing industry crashed and is fighting to regain its balance.

I wish I could offer a quicker or better solution, but I can't.

Dr. John Hilston is an associate professor of economics on the Brevard Community College Palm Bay campus.