After long months of wrangling, the U.S government and 49 states announced yesterday a settlement agreement in the bank foreclosure scandal. But despite the tough negotiating stances taken by some states attorneys general, the end result represents only a drop of relief in the bucket of bad U.S. mortgage debt, and an executive of the world’s largest bond investment fund says the deal punishes pension funds and bond investors more harshly than it does the errant banks.
The $25 billion settlement with the nation’s five major mortgage lenders includes $10 billion in direct principle reduction on underwater mortgages and another $10 billion for “other forms of mortgage relief,” according to National Mortgage News: refinancing underwater borrowers, forgiveness of deficiencies after short sales, and principal forbearance for unemployed borrowers. The remaining $5 billion will be paid directly to state and federal government.
The $10 billion in principle reduction falls short of making a meaningful impact on the nation’s housing market, according to Moody’s Analytics chief economist Mark Zandi in Senate testimony yesterday:
The co-founder of Moody's Analytics told the senators that a $20 billion principal reduction program would have enough scale to impact the housing market. More than 650,000 homeowners could benefit from an average $30,000 reduction in their loan balance.
But according to Bloomberg, what has Scott Simon, head of Pacific Investment Management Co.’s mortgage business, frustrated is that the five banks involved in the settlement—LIST—are getting credit for modifications on loans they no longer hold or service—at the expense of pension funds and mortgage securities holders.
“This was a relatively cheap resolution for the banks,” said Simon, the mortgage head at Pimco, which runs the world’s largest bond fund. “A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”
Asset managers are frustrated with the deal because, in addition to the debt the banks own, it gives credit to the lenders for changes to loans they hold no interest in and oversee for investors. That “treats people’s 401(k)s and pensions,” which hold mortgage securities, “like perpetrators as opposed to victims,” Simon said. The deal comes after all 50 states announced a probe into foreclosures in 2010 following disclosures of faulty documents used to seize homes, costing bondholders as liquidations of bad debt were delayed.
“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that,’ ” Simon said yesterday in a telephone interview from Newport Beach, California.
The final settlement, once it is inked and filed in court, may be even less promising than news reports indicate. As a ZeroHedge article by Tyler Durden, citing American Banker, points out, the actual legal documents have not been provided for public review. From American Banker:
More than a day after the announcement of a mammoth national mortgage servicing settlement, the actual terms of the deal still aren't public. The website created for the national settlement lists the document as “coming soon.”
That's because a fully authorized, legally binding deal has not been inked yet.
The implication of this is hard to say. Spokespersons for both the Iowa attorney general's office and the Department of Justice both told American Banker that the actual settlement will not be made public until it is submitted to a court. A representative for the North Carolina attorney general downplayed the significance of the document's non-final status, saying that the terms were already fixed.
Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist. Instead, there are a series of nearly-complete documents that will be attached to a consent judgment eventually filed with the court. That truly final version will include things such as servicing standards, consumer relief options, legal releases, and enforcement terms. There will likely be separate state and a federal versions of the release.
Some who talked to American Banker said that the political pressure to announce the settlement drove the timing, in effect putting the press release cart in front of the settlement horse.
Even if the announced terms do line up with the legally binding documents, few analysts believe the settlement will do much to shore up the struggling U.S. housing sector, or that it will be any more successful than prior government bailouts and stimulus programs. The bottom line is that keeping inefficient, too-big-to-fail institutions on artificial life support only contributes to a “zombie” economy and prolongs the surgical remedies that must occur before a healthy, market-based economy can emerge.