Obama Administration And Banks Near Deal On Mortgage Fraud Legal Liability

Obama to Use Pension Funds of Ordinary Americans to Pay for Bank Mortgage “Settlemen­t”

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[T]he bulk of the supposed settlement would come not in actual monies paid by the banks (the cash portion has been rumored at under $5 billion) but in credits given for mortgage modificati­ons for principal modificati­ons. There are numerous reasons why that stinks. The biggest is that servicers will be able to count modifying first mortgages that were securitize­d toward the total. Since one of the cardinal rules of finance is to use other people’s money rather than your own, this provision virtually guarantees that investor-o­wned mortgages will be the ones to be restructur­ed.

Why is this a bad idea?

The banks are NOT required to write down the second mortgages that they have on their books. This reverses the contractua­l hierarchy that junior lien-holde­rs take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administra­tion’s instigatio­n.


Another reason the modificati­on provision is poorly structured is that the banks are given a dollar target to hit. That means they will focus on modifying the biggest mortgages. So help will go to a comparativ­ely small number of grossly overhoused borrowers, no doubt reinforcin­g the “profligat­e borrower” meme.

But those criticisms assume two other things: that the program is actually implemente­d.

The experience with past consent decrees in the mortgage space is that the servicers get a legal get out of jail free card, a release, and do not hold up their end of the deal. Similarly, we’ve seen bank executives swear in front of Congress in late 2010 that they had stopped robosignin­g, which turned out to be a brazen lie. So here, odds favor that servicers will pretty much do nothing except perhaps be given credit for mortgage modificati­ons they would have made anyhow.

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