Luis Alvarez/Associated PressTom Miller, attorney general of Iowa.
MARCH 16, 2011, 3:14 PM
In ProposedMortgage Fraud Settlement, aGift toBig Banks
Lurking in a proposed mortgage fraud settlement with thestate attorneys general is a clause that could be worth billionsfor the big banks. Yes, I mean the settlement that might extract thesupposedly large sum of $20 billionfrom the banks to settle foreclosure fraud. The one denounced as a“shakedown”by SenatorRichard
Shelby of Alabama.Despite such rhetoric, the settlement might let the banks avoid tens of billions of write-downs,thanks to a clause with a biblical flavor: the last shall be first.The proposed agreement — which is preliminary and subject to intense negotiations being led by Tom Miller, the attorney general of Iowa — would allow banks to treat second mortgages,like home equity lines of credit, just like the first mortgages. Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down “at leastproportionately to the first.”Suddenly, the banks would be given license to subvert the rules of payment hierarchy, asGretchen Morgenson pointed outin
The New York Times on Sunday. Yes, the clause says theother alternative is to wipe out the second’s value entirely, but given a choice, the banks would be extremely unlikely to do that.So how is this a gift? Because when the principal on the first mortgage is reduced, the secondlien is typically wiped out. The first lien holder has the first right to any money recovered, andthe second lien holder has to wait its turn.The proposal “seems astonishingly generous to the second-lien holders,” said Arthur Wilmarth,a law professor atGeorge Washington University . “And who are those? Of course, they are the big mortgage servicers.” And who owns the big mortgage servicers?The biggest banks.Throughout the financial crisis, we have heard plenty of intoning about the sanctity of contracts.But this suggests that the banks, with the authorities’ tacit approval, think contracts are for theeand not for me. The price to get the banks to do the right thing contractually with mortgagemodifications and foreclosure is to allow them to not do the right thing elsewhere.To understand the significance of this issue, cast your mind back to the height of the housing bubble. People used their homes as A.T.M.’s, withdrawing billions from their equity to finance
InProposed Mortgage Fraud Settlement, a Gift to BigBanks - NYTimes.com http://dealbook.nytimes.com/2011/03/16/in-proposed-mortgage-fraud-set...1 of 3 3/17/2011 11:32 PM