Big Foreclosure Settlement Still Not Really, Truly, Finally Done

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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Read the Article at HuffingtonPost