From Naked Capitalism:
… previous leaks have indicated that the 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 lienholders 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. (Emphasis added)
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.
There are two clever features of the deal, but neither look intended to benefit ordinary citizens. One is that the deal throws some funding at chronically cash stressed mortgage counselors. They are thus certain to voice approval of the pact. The other is (per the FT story) the deal’s “most favored nations clause” is designed to reduce the bargaining leverage of any AGs that go their own way. It means that any servicer will have the incentive to fight hard against giving any state a better deal because it will automagically trigger improved terms across the states that signed on to the Federal deal. But this may have interesting perverse effects, since banks that refuse to settle with breakaway AGs will ultimately have damages awarded by a court. That means longer and most costly fights by the states, but in most cases, ultimately bigger awards (frankly, the fact set is so bad that all the state AGs need to do is focus on fairly conservative legal theories to have good odds of scoring big wins).
Yves has been an excellent watchdog on the whole mortgage mess. At this point, we’re still in speculation as there’s no settlement yet, and while the Obama administration has been pressuring individual states to back off prosecution, this is still a developing story.