Follow-up to housing pact will be crucial

Among the most persistent problems in getting the U.S. economy moving again has been the inability to thaw the frozen housing market. With 10.7 million homes stuck with mortgages higher than the property value - about 22 percent of all housing loans, according to CoreLogic - too many Americans are in no position to sell or invest in home improvements.

Even those mortgage holders successfully treading water are reluctant to enter into a troubled housing market. This fear of an inability to sell has damaged the normal elasticity of the U.S. economy, inhibiting the natural flow of workers to jobs. A stalled housing market has a cascading affect over the entire economy.

The $25 billion settlement announced Thursday between the federal government, 49 states and five large banks will not address all the problems with the housing market, but it could begin a slow defrost and that, certainly, is welcomed news.

President Obama's administration played a key role in persuading state attorney generals from across the country to agree on the settlement with five major banks - Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. Only Oklahoma declined. The agreement could lead to further settlements involving as many as nine other banks.

The banks had faced a series of lawsuits from states and various federal agencies for a series of abuses leading to the housing crisis and its aftermath. In 2010 the nation learned of so-called robo-signing, a practice in which banks were signing off on foreclosure documents with no effort to verify accuracy, communicate with borrowers or explore loan adjustments.

The largest portion of the settlement, about $17 billion, will go to borrowers at risk of foreclosure. These mortgage holders will have the opportunity to reduce the principal on both first and second mortgages, bringing the loans in line with the actual value of the homes.

For borrowers who have managed to stay current on their loan payments but owe more than their homes are now worth, there will be an opportunity to refinance at a lower rate.

Borrowers who were foreclosed on in the rush of robo-signings from 2008 to 2011 will be eligible for cash payments estimated at between $1,500 and $2,000. The settlement administrator will contact eligible borrowers.

Given the size of the problem - those underwater mortgages equal about $700 billion according to CoreLogic - this settlement will not fix the housing market. The deal does not cover mortgages owned by the Federal Housing Administration or loans transferred to private investors. Most distressingly, the deal excludes Fannie Mae and Freddie Mac, the government's housing finance agencies that hold about half the nation's mortgages.

The Obama administration needs to keep pushing. Fannie and Freddie are reportedly studying principal-reduction plans proposed by the White House.

Whether the settlement turns out to be a major development or a small victory depends on two things. How vigorously and effectively will it be carried out? And will it provide the momentum for further agreements that help heal the housing market?

President Obama has every political motivation to make sure help gets to those in need expeditiously and that more announcements follow. Between this settlement and signs of the economic recovery finally taking hold, this could prove to be a turning point. Or maybe not.