As regulators push to finalize a national mortgage settlement, investors are sounding alarm bells about the deal.
Eager to claim some progress in addressing the foreclosure crisis, anonymous government sources keep insisting a final deal with five big banks that “service” or manage mortgage loans is imminent, with papers set to be filed in a Washington district court this week.
Investors can wait. They say that this agreement, instead of punishing banks for their role in the foreclosure mess, hands them more fat gifts at investors’ expense.
One benefit for banks — Ally Financial, JPMorgan Chase, Citigroup, Wells Fargo and Bank of America — is that second mortgages and home equity lines of credit will not be wiped out. These banks own about 42 percent, or $375 billion, of outstanding second liens and home-equity lines. When a first mortgage is modified, the second lien will be written down, too — so the bank still wins, since a homeowner is more likely to repay a modified second lien.
“The AG settlement is like charging a patient an extra fine when their doctor is found guilty of malpractice,” Laurie Goodman, senior managing director at Amherst Securities Group, wrote in a recent report. “The wounded patient is hurt again, and the doctor does not have much incentive to change his behavior.”
The $25 billion deal calls for Ally Financial, JPMorgan Chase, Bank of America, Wells Fargo and Citigroup to allocate $17 billion, mainly for writing down troubled mortgages. These last four banks service more than half of one- to four-family home mortgages in the US.
This week, ratings agency Fitch joined the growing chorus of concern. Fitch said write-downs might flop unless total debt is taken into account, because mortgages are only one iceberg in an ocean of consumer debt. As cash-strapped Americans increasingly use credit to buy food and gas, many can’t keep up with mortgage payments even after a modification.
Not only that, but the four biggest banks have negotiated unusual protections for $375 billion of second liens held on their books. The deal on the table now has several provisions to shore up the value of their second liens.