naked capitalism

Never underestimate the ability of banks to find new and creative ways to steal.

The latest brazen scheme comes in a report from the Financial Times on the current state of play on the so-called multi-state mortgage settlement negotiations. Readers may recall that even though a nominal settlement total of $25 billionish has been bandied about for some time, comparatively little of that is to be in cash. The bulk of the amount is to come from credits for principal modifications.

We’ve said this is patently inadequate, since the damage done by servicer driven foreclosures (something yet to be dimensioned adequately), bogus charges to investors, and damage to land records goes way beyond the amount under discussion. Catherine Masto of Nevada got somewhere between $27,000 and $57,000 per homeowner from one servicer, Saxon, which puts the amounts being discussed here to shame. And even though we took issue with how the CFBP came up with its math, it went through an exercise intended to determine how much the servicers should pay as disgorgement. The amount they should pay for damages has never been estimated, and by any logic should be considerably larger.

But not only are they not going to pay enough, and not much in hard money, the banks are now trying to shift the cost of their settlement on to investors. Their passivity in the face of rampant abuses proves they make for great stuffees. Per the Financial Times:

Investors in US home mortgage bonds may have to swallow losses as part of a wide-ranging settlement being discussed between leading banks and the Obama administration to resolve allegations of foreclosure misdeeds…

As a result, the five largest US mortgage servicers – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – would avoid some of the cost of the potential $25bn settlement…

According to the terms of the settlement currently under discussion, each of the banks involved will have to meet a certain dollar target to fulfil their end of the deal. Each dollar of reduced payments or overall loan balances would be treated like a credit. A dollar of principal reduction on loans held on the banks’ own books would get a higher credit – for example, 100 cents on the dollar – than reducing a dollar of loan principal on mortgages owned by bond investors.

The servicers would have to determine that a mortgage restructuring would be more beneficial to the investor than a foreclosure, and the contracts governing the mortgage securities would have to allow for loan modifications. Investors probably would have no say in the decision, according to people familiar with the matter.

Mortgages serviced on behalf of taxpayer-owned giants Fannie Mae and Freddie Mac would not be eligible for principal reduction, though they would be eligible for other types of modifications.

Officials have discussed giving the banks credit to the tune of roughly 50 cents on the dollar for cutting the principal on mortgages owned by bond investors.
Because the banks would get less credit for reducing the principal on bond investors’ mortgage holdings, some officials expect that the banks would mostly cut principal balances on their own mortgages.

This idea is ludicrous. It is one thing to have discussed a solution that involves principal mods (which we favor) with investors as party to the negotiations. As we have indicated, with loss severities in private label mortgage securitizations running at 75%, there is a lot of room for deep principal mods that would leave investors better off than a foreclosure. They could have helped make sure any modifications had processes in place that protected their interests.

By contrast, this latest iteration of the settlement plan is guaranteed to come largely out the hides of investors in so-called private label deals, meaning non-Fannie and Freddie. The idea that only private investors take losses and not the GSEs is bad enough, but the basic premise that the banks get to dump the costs of settlement of their own malfeasance on already abused investors is a travesty.

And the notion that the banks will take the losses themselves rather than shift losses onto third parties because they’d only get a 50% credit shows that someone has a screw loose. Come on! If the people involved in the talks really don’t understand the difference between spending your own money versus someone else’s money, they should not be allowed near a checkbook, much the less a negotiation.

In fact, I can tell you exactly what will happen: all the mortgage mod money will come out of investors, and it will come out of the very biggest loans, since the bigger the loan, the fewer the number of mods the bank has to make (the cost of making a mod is not related to the size of the loan). So that means that this approach assures that the mods will go to comparatively few people in big ticket homes and will do nada to help middle and lower middle class people.

One correspondent speculated that this idea may have been leaked to undermine what little support there is for the settlement talks. Perhaps. But I’m cynical enough to believe that this is a mere continuation of the pattern we’ve seen throughout this Administration: it gives the banks something that it can spin as being tough on financiers but is actually very helpful to them, and the banks still press as hard as they can to get every additional gimmie they can squeeze from a weak and compliant officialdom.