Update on the AG’s: Global Settlement Unlikely; Loan Mods Not a Problem to Investors, Despite Banks Say So…

25 Nov

50 State Attorney General Mortgage Probe Rejects Idea of Global Settlement

from naked capitalism by Yves Smith

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Bloomberg provided a useful update on the 50 state attorney generals’ investigation into mortgage abuses.

One key development is that the AGs are treating investors as parties whose interests need to be considered. This appears to be at odds with the approach taken by Federal regulators, who are devising and implementing exams of various sorts which look to be purposely superficial (well, of course, if the real agenda is to change things as little as possible, you don’t need to do much outreach). Another is that the AGs have rejected the idea of a global settlement and are instead looking at a bank-by-bank approach (although presumably there will be some common elements across all deals).

But there are some inconsistencies in the piece, which suggests the spin is hot and heavy. For instance, the article does the reader the disservice of repeating the canard that principal mods hurt investors, although it finally offers this comment:

Banks have suggested the securities owners may block a settlement that includes loan modifications, said Chris Katopis, executive director of the Association of Mortgage Investors.

“The servicers are painting us as a convenient patsy,” he said. “We find it absolutely inaccurate that we’re holding up the modification process.”

This is really not hard to understand or get right. Foreclosures now are producing losses that exceed 70% of the mortgage balance on average. A deep principal mod for viable borrowers would be a win-win for everyone besides the servicer and subordinated bond investors. Because servicers keep advancing principal and interest to investors, subordinated bonds, which by any standard should be worth zero are instead getting interest advances. In the House Financial Services committee hearing on mortgage documentation issues, Maxine Waters asked a panel of banking industry representatives to provide names of investors who were opposed to mortgage mods and a Bank of America representative ‘fessed up that it was very few.

Another tension in the article is that it contends, without providing names, that investors want a “resolution” and that is treated as meaning a speedy resolution. But we hear again from Iowa attorney general Thomas Miller, who is playing a lead role in this effort, that a quick settlement is not in the cards. And given the dynamic outlined above, that principal mods will produce better outcomes for the vast majority of investors than foreclosures, and that banks will not come around to accepting that point of view quickly (principal mods would, among other things, have a nasty impact on the valuations of their second mortgages), the ones who are up to speed on this issue presumably recognize that a process that considers their views is not going to move at a fast pace. One attorney who has good contacts with major mortgage investors commented by e-mail:

Whenever I see indications, particularly comments off the record by “officials”, that a settlement might be near, I suspect it is Michael Barr that is behind it. Treasury desperately wants this issue to go away. Unfortunately, they haven’t suggested any solution that would work.

While there it no way to be certain that Treasury is behind this press meme of “quick settlement” when the AGs have repeatedly made clear that is not in the cards, it does not seem terribly likely that investors are champing at the bit.

The last bit of intelligence from Bloomberg is that in addition to their combined effort, some AGs are also pursuing separate initiatives. For instance, Illinois’ Lisa Madigan has made information requests of 26 mortgage companies. Bloomberg also reported separately that Maine has successfully pressured Bank of America and GMAC into suspending foreclosure.

The fact that this investigation is moving at a measured pace is a good sign. Only a cosmetic effort could be wound up quickly.


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