JP Morgan agreed earlier this week to pay out some $13 billion after it, and two banks it bought, sold investors nearly $1 trillion-worth of the dubious securities at the heart of the financial crisis. While the settlement is record-breaking, it’s in some ways less than meets the eye—and it might even hurt the struggling homeowners whose mortgages were the basis for those securities.
Critics point out that, when you break down the settlement, the bank didn’t necessarily admit guilt. It’s paying only $2 billion in penalties. Another $7 billion is going in restitution to various government agencies, and the latter is tax-deductible, reducing its impact. The final $4 billion will go toward relieving the burdens of struggling homeowners with JP Morgan mortgages—a move that will also help the bank, by improving the quality of its loan book.
That relief is especially targeted at homeowners in troubled areas like Detroit. Many are underwater, meaning their loans are now worth more than their homes, and they can’t afford to pay them off. $2 billion in the settlement is earmarked to write the values of these loans down to a more reasonable level. But there’s a problem: Unlike JP Morgan’s penalties, any reduction in the principal of a loan will be treated as income, and taxed. In the last mortgage settlement, the average reduction was $100,000.
That means people who might be making the US median income of about $50,000 a year could suddenly have to pay taxes on an additional two years’ salary. That could wipe out their savings, put them in debt, or force them to prove to US tax collectors that they are essentially bankrupt. None are good options.
There ought to be a law to protect them, right? Well, there is one. Congress in 2007 exempted debt forgiveness from taxes, for exactly this reason. The trouble is, that law expires at the end of this year, before JP Morgan will begin reducing its borrowers’ debts. And while the Obama administration supports extending the exemption as part of on-going budget talks, it’s not clear if Congress will do it. While cutting taxes might seem like something that Republicans can get behind, the more conservative ones at least see it as a bailout for bad debtors. And the financial lobby fears it will make it easier for homeowners to walk away from debt, often by selling their home for less than it is worth.
But without such an extension, the government’s attempt to punish banks for the consequences of their actions will end up punishing homeowners too, and specifically, the ones who can least afford it.