Great for the Banks

Understanding why banks are embracing this approach is easy. They already know that they're going to have to concede more here, so they might as well try to limit their losses. The might like the agreement above for a couple of reasons.

First, if their additional settlement cash provided more aggressive mortgage modifications for delinquent borrowers, then their subsequent losses would continue to pile up in later years. Mortgage modifications have a very high rate of re-default. Banks want to foreclose on as many borrowers as possible whose default they see as inevitable.

Second, this move will actually make the borrowers who can pay much less likely to strategically default. Imagine you've got a 6% interest rate on a $250,000 mortgage on a home that is now only worth $200,000. If the bank forgave that $50,000 in excess principal, your mortgage payment would be reduced from about $1,500 per month to about $1,200 per month. If it refinances your $250,000 loan at 4%, however, then your payment still becomes around $1,200 per month. Psychologically, underwater borrowers won't feel so bad about their mortgages once they're able to take advantage of refinancing at the prevailing, very low interest rates.

Then, there's the really huge potential advantage for banks. For any of these refinanced mortgages that they're holding on their balance sheets, they won't face a loss. Because the principal for these loans would remain intact, they would book the new loan for the same amount. So it would create no capital hole like mortgage principle write downs would. Loans they hold as securities, however, would decline in value, since their prepayments would rise due to the refinancing boom. This means the big losers under the plan would be investors, Fannie Mae, and Freddie Mac.

Great for the Economy

While there are certainly those who would like to see the banks suffer as much as possible for their misdeeds surrounding foreclosure, the U.S. economy is much better off if its banking system is healthy. By providing banks with broad legal immunity, a huge portion of their mortgage litigation risk suddenly disappears. Investors will see this as a significant step forward in ensuring the financial system's stability. As bank stock prices begin to recover and certainty on potential litigation related losses improves, banks will also be more willing to lend to businesses that want to create jobs.

Those homeowners who obtain refinancing will also clearly benefit. As mentioned, many will see their mortgage payments decline by a few hundred dollars or more per month. That's real money -- money that can now be spent to stimulate the economy or pay down their debt. That spending should help to create jobs, as firms that sense more demand will ramp up hiring. But Americans' debt deleveraging will also help: the sooner Americans feel comfortable with their finances, the sooner they'll feel they can spend more freely.