More on the Role of Second Liens and the Mortgage Settlement as Stealth Bank Bailout

Readers who missed the post over the weekend entitled “Schneiderman MERS Suit and HUD’s Donovan Remarks Confirm That Mortgage “Settlement” is a Stealth Bank Bailout” are advised to read it first, since it provides important background and context for this piece, which clarifies some issues I skipped over.

To give a brief recap of the post: both a small group discussion with Shaun Donovan (reported by Dave Dayen of Firedoglake and separately by Shahien Nasirpour of the Financial Times) and the Schneiderman MERS lawsuit on Friday confirm our previously-stated hypothesis that the settlement is really a transfer from mortgage investors to banks. That is why the banks remain willing to participate as the release has been whittled down to appease the formerly dissenting attorneys general (remember, the old reason for the banks to go along was that it was a cash for release deal: the banks were willing to pay hard money to get a significant waiver of liability).

The reason this settlement amounts to a transfer is the banks will be given credit towards the total reported value of the settlement for modifying mortgages that they do not own, meaning that economic loss will be borne by investors. Servicers have an obvious incentive to shift losses onto other parties whenever possible, and so the only principal mods they are likely to do of loans they own are one they would have done anyhow.

Check out the rest here…