Thursday, February 24, 2011

Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated « naked capitalism

Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated « naked capitalism: "Even so, the mortgage “settlement” trial balloon floated in the Wall Street Journal this evening is an offense to common sense and decency. Notice how the word “fraud” is pretty much verboten in the MSM; the latest code word for what went awry is “breakdown”. This implies a benign sort of neglect, simply of not doing sufficient maintenance which led fussy machinery to quit working. It is mean to avoid contemplating, let along uncovering, Pinto-type decisions of weighing the costs of making the vehicle safer versus the litigation losses resulting from incineration by exploding gas tanks"
The magic number across the industry is a mere $20 billion in civil fines or payments to fund loan mods. We know from BP not to have a great deal of confidence in settlement funds. It is not yet clear what scope of activities get a free pass (fraudulent servicer charges and impermissible compounding fees? failure to convey notes to mortgage trusts as stipulated in the PSA? foreclosing on home where HAMP mods had been promised?) but the industry will want any waiver to be as broad as possible. But in any kind of settlement of fraud, like securities fraud charges, various responsible parties are also barred from working in the industry, sometimes for life. None of that is on the table.

The plan involves having servicers give borrowers principal mods, but obviously only to the extent of the fund amount. The WSJ story announces that mortgage investors will suffer no losses. This shows how backwards the logic here is. Investors would LOVE principal mods to qualified borrowers; it’s far better than taking 70%+ losses on foreclosures. So saving RMBS investors any pain should never have been a feature of the plan design. And that means it is really a fig leaf for avoiding writedowns on second liens, which are heavily concentrated in the four biggest TBTF banks.

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