Quelle Surprise! Banks Plan to Fob off Some of the Costs of Multi-State Mortgage Settlement on Investors

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.

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  1. SteveA

    So they’re going to push (part of) the cost onto parties who are not involved in the settlement talks. And no doubt the settlement will be one of those “no admission, no denial” specials to keep ammo from the bondholders in any suits they might file against the banks.

    How exactly does this Administration intend to bring private capital back into the US housing market?

  2. Conscience of a Conservative

    Now explain to me how this restarts lending in the private mortgage market? As an investor I would be less inclined than ever to allocate funds toward mortgage credit.

    And the money for these mods comes from tax payers which is yet another heads I win , tails you lose bank bet. In the Fed’s white paper when Bernanke said the the problem was he wasn’t reaching all the home owners that was not exactly right, he should have said, he wasn’t providing relief to all the banks mortgage liabilities.

  3. LucyLulu

    All you hear about is how oppressive regulation and taxes are discouraging the “job creators” from investing in the economy. And I’m not convinced we need to pass more regulations. But it doesn’t matter how many or few regulations or what kind of tax program we have when the elite just ignore them at will. The true “small business owner” however has to bear the burden of complying with any rules and laws, as they are subject to enforcement actions, but also the cost of the big players that don’t.

    Time to Occupy the Attorneys Generals (and another call to one certain AG).

  4. Conscience of a Conservative

    It’s clear one of the biggest problems facing investors in securitized products is that the servicer’s interests are not aligned with the investors. I was at a conference years ago when a p.m. from a larger insurer said he was not a fan of investing in CMBS because he couldn’t control the docs or the servicer, and preferred to under-write the loans individually.
    I often think back to that person and how prescient he was.

  5. jake chase

    It continues to amaze me how clueless the Obama administration is when it comes to real estate. The economy will remain dead in the water until home prices fall enough to become affordable to a generation now priced out of them. Foreclosures have become impossible thanks to bankster fraud, so we have housing remaining at unrealistically high prices for three years, construction absolutely dead. A mortgage litigation industry is no substitute for a home construction industry. Nothing can possibly work except a universal buyout which eliminates debt that can never be repaid, and much of which cannot even be serviced, out of ever shrivelling middle class incomes. What we need in addition to a bailout is to make mortgage investors whole at the expense of responsible banksters, many of whom should be stripped bare and incarcerated for at least a decade. Let the banks survive if you must, but claw back the compensation and put the individuals responsible in jail. Identifying them will be ridiculously easy: just obtain a compensation printout for the years 2001-2007. The first wave should include every bank CEO who made more than $10 million. The idea that any of them actually earned $10 million is grotesque. For those who care, Robert Rubin took home $274 million during the eight years of his nine year apprenticeship with Citi for which the company disclosed his compensation. All I can say to this is, What About Bob!

    1. JS


      The Obama Administration is NOT clueless. They know exactly what they are doing. Consider that Obamas’s Chief of Staff came directly from JPMorgan Chase, where he was the senior executive in charge of lobbying.

      While we are all desperate to at least assume good intentions, the Administration’s actions tell a different story. Many of the hard nosed Republicans make the administrations intentions seem noble, but that’s only because these Republicans are more transparent than the Administration. They are all owned by the banks.

      1. Patrick

        Spot on! Better to give the impression of being a rube rather than being seen as, at best, an enabler, or worse still, as an accomplice. We tend to forgive clueless, conniving not so much.

    2. SFC

      And where will the money for this “universal bailout that eliminates debt” and “making mortgage investors whole” come from? The elimination of debt will eliminate the mortgage investments. You are suggesting another taxpayer bailout of epic proportions. The banks don’t have the (billions of $) to take, unfortunately.

  6. rd

    The MF Globalization of the US financial system.

    Take large risks using other people’s money without their knowledge.

    Put profits in your own pocket.

    Work with the financial regulators and legal system to dump the losses on the people who weren’t even aware they were part of your risk taking.

    They used to have to hide this stuff so the auditors wouldn’t find it. It appears they don’t need to anymore.

  7. nowhereman

    You know, it’s almost like there is a group of people whose sole purpose is to determine which group to screw over next.
    How any rational being can have their assets anywhere near these criminals is beyond my comprehension.
    And yet the band plays on.

  8. indio007

    This agreement has zero chance of actually being implemented . In fact , every announcement is worse than before , so why the PR game?

    I’m starting to think these announcements are only for the purposes of boosting/stabilizing the stock price of a certain Bank (of America) with a large legal exposure. Rumors have been keeping the stock from sinking below $5 for over a month.

  9. Susan the other

    If the government, that is us, did finally bail out the mortgage industry wouldn’t the money go to the investors and the house to the homeowner/occupant? Wouldn’t the “banks”, who only collect fees for this massive tangle, be left out, and wouldn’t they also have no business to book? With the banksters out of the picture, the mortgage and housing industry would start up with new, direct channels brokering for borrowers and lenders.

  10. Patrick

    You have to grudgingly admire the sheer audacity that the bankers have displayed in this whole mortgage debacle. They firstly manage to “socialize” their losses on to the tax payer; now they are seeking to privatize the costs of their government settlement through their investors. When are they going to carry the can for their malfeasance?

    How an industry can screw its borrowers, its investors, the tax payer, and then still preach financial austerity to all and sundry just beggars belief! You couldn’t make this up and have it be believed by a 5 year old.

  11. Main Street Muse

    Okay, so run this by me again… bankers approved loans that people had no hope of paying back; bankers “securitized” these loans to “spread the risk;” bankers got bailed out when it became apparent that these risks had toppled the system….

    And now bankers get to pass the “settlement costs” (which really should be considered “fines” not costs) onto their investors?

    Until bankers are held accountable for such flagrantly unsustainable business practices, we will continue to see the issues played out again and again – with everyone but the bankers paying the price.

    [Closed all my Chase accounts this week. One small step to signal my displeasure with the big banks.]

  12. Bravo

    Yes, Main Street Muse, it is simply akin to paying a “fine” for running a stoplight, when if the facts were really investigated, the analogy would be that the industry had “hit and run” thousands of essentially defenseless people for profit. Guess we have the SEC to thank for establishing such precedent.

  13. Hondo

    As a large institutional investor we are (and have been) out of mortgages and will most likely not provide capital to this sector of the market. The mortgage market has become more and more manipulated with both the government and investment banks trying to steal capital….I don’t know what institutional investor would provide capital under these conditions but I’m sure there are still some fools out there.

  14. DCR

    I expect a large fraction of the banks’ “principal forgiveness” to come on write-offs of underwater second liens which they have no prayer of ever recovering. So in reality, as compensation for all the frauds the banks perpetrated on hundreds of thousands (if not millions) of home purchasers the AGs are “demanding” the banks relinquish an “asset” they don’t even have in reality. Justice, bought and paid for.

  15. Foreclosureblues

    restitution will never be paid…

    1 they don’t have the cash and

    2 they would never fork it over even if they did

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