Payments for Improper Bank Foreclosures Are No Undeserved Windfall

No one disputes that the housing crash has had huge economic impacts throughout the nation. But once you start talking about evicted homeowners getting cold hard cash, tempers often flare among people who disagree about whether taxpayer dollars are going to the right place.

With a recent announcement from the Federal Reserve and the Office of the Comptroller of the Currency, though, it's hard to argue that homeowners are getting an unfair windfall. Given what happened to these homeowners, the compensation they're getting seems perfectly reasonable as a quick way to settle what otherwise could become a massive morass of litigation.

Foreclosures gone wrong

Last week, the Fed and the OCC announced a framework under which banks that improperly foreclosed on homeowners' properties would compensate homeowners for their mistakes. The figure that has drawn the most headlines is that homeowners could receive as much as $125,000 from banks under the program.

But this isn't just another government handout. For one thing, money is coming directly from the 14 mortgage servicing companies that made the mistakes. So while shareholders of the companies, which include PNC Mortgage (PNC) and Citigroup (C), could suffer, taxpayers won't see any hit.

What's fair is fair

More important, though, is that the biggest payments are reserved for situations in which homeowners actually had their homes taken away from them improperly, and in which the bank or other mortgage servicer can't undo the damage and get the home back in the hands of the homeowner.

In particular, the $125,000 payments apply to situations in which the company either violated a federal law protecting members of the U.S. armed forces, foreclosed on a borrower who wasn't in default, or failed to apply an already-approved permanent modification to the homeowner's loan. In any of these cases, homeowners would have legal recourse against the servicing companies regardless.

Moreover, if the bank or servicing company can get homeowners back in their homes, then any payments are far less. For instance, banks that rescind foreclosures and correct both credit reports and their own records would only have to pay $15,000 under the plan. That's not much when you consider the inconvenience that many homeowners have suffered from these mistakes.

• <p class="p1"> For real estate buyers who have the cash and credit to take advantage of historically low mortgage rates, there is one market type that tends to be more resilient than others: the college town.</p><br /> <p class="p1"> Established, big-name universities, with their steady and ever-replenishing supplies of new students, faculty and administrators, virtually guarantee tenants and future buyers. Additionally, more retirees are choosing to move to college towns for the cultural amenities. Of course, the downsides for home buyers, particularly investors, are that renting in college towns is a somewhat seasonal business, with a summer decline, and there's always the threat of keg-party damage.</p><br /> <p> <em>Foreclosure sales data compiled by</em> <a href="http://www.foreclosurenewsreport.com/" target="_blank">Foreclosure News Report </a><em>for the first half of 2011.</em></p>
• <p> The College Town of: <strong>Stanford University</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>94</strong></p> <br /> <p> Average price of foreclosures: <strong>$350,886</strong></p> <br /> <p> Percent below the average price of properties: <strong>69%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>17%</strong></p> <p> </p>
• <p> The College Town of: <strong>Ohio State University</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>999</strong></p> <br /> <p> Average price of foreclosures: <strong>$57,700</strong></p> <br /> <p> Percent below the average price of properties: <strong>58%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>17%</strong></p> <p> </p>
• <p> The College Town of: <strong>University of Louisville</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>889</strong></p> <br /> <p> Average price of foreclosures: <strong>$84,495</strong></p> <br /> <p> Percent below the average price of properties: <strong>51%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>25%</strong></p> <p> </p>
• <p> The College Town of: <strong>Northwestern University</strong></p> <p> </p> <br /> <p> Amount of properties sold: <strong>74</strong></p> <br /> <p> Average price of foreclosures: <strong>$190,930</strong></p> <br /> <p> Percent below the average price of properties: <strong>47%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>24%</strong></p> <p> </p>
• <p> The College Town of: <strong>Louisiana State University</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>221</strong></p> <br /> <p> Average price of foreclosures: <strong>$115,043</strong></p> <br /> <p> Percent below the average price of properties: <strong>45%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>14%</strong></p> <p> </p>
• <p> The College Town of: <strong>University of Arizona</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>3,068</strong></p> <br /> <p> Average price of foreclosures: <strong>$116,916</strong></p> <br /> <p> Percent below the average price of properties: <strong>41%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>50%</strong></p> <p> </p>
• <p> The College Town of: <strong>University of Tennessee</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>431</strong></p> <br /> <p> Average price of foreclosures: <strong>$108,595</strong></p> <br /> <p> Percent below the average price of properties: <strong>41%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>8%</strong></p> <p> </p>
• <p> The College Town of: <strong>Florida State University</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>339</strong></p> <br /> <p> Average price of foreclosures: <strong>$112,790</strong></p> <br /> <p> Percent below the average price of properties: <strong>35%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>29%</strong></p> <p> </p>
• <p> The College Town of: <strong>Texas Tech University</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>74</strong></p> <br /> <p> Average price of foreclosures: <strong>$91,454</strong></p> <br /> <p> Percent below the average price of properties: <strong>33%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>5%</strong></p> <p> </p>
• <p> The College Town of: <strong>University of Michigan</strong></p> <br /> <p> </p> <p> Amount of properties sold: <strong>130</strong></p> <br /> <p> Average price of foreclosures: <strong>$181,766</strong></p> <br /> <p> Percent below the average price of properties: <strong>31%</strong></p> <br /> <p> Percent of foreclosures from all home sales: <strong>24%</strong></p> <p> </p>
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Also, much smaller payments apply to less serious situations. For instance, servicers that violated the terms of federal loan modification programs by not contacting eligible homeowners would only have to pay $1,000.

Some of the complaints that homeowners have unfairly benefited from government programs related to housing are valid. But in this case, it's hard to argue that homeowners who were unfairly thrown out of their homes don't deserve what they'll get under this framework.

For more on housing and real estate:

• Real Estate CEOs Are Landing Huge Raises
• 6 Simple Reasons Why You Shouldn't Buy a Home
• Homes for Rent, $208 a Month

Fool contributor Dan Caplinger won't get a dime from any of these programs. He doesn't own shares of the companies mentioned. You can follow him on Twitter here. The Motley Fool owns shares of Citigroup and PNC Financial.