$26 Billion Mortgage Settlement Rips Off Investors to Trim Banks’ Massive Costs of Bailing Out Deadbeat Borrowers

by Hans Bader on February 10, 2012

in Bailout Watch, Economy, Legal, Politics as Usual, Property Rights, Zeitgeist

The $26 billion mortgage settlement announced yesterday is bad news for “bond investors including pension funds, according to Pacific Investment Management Co.’s Scott Simon,” notes Bloomberg News.  He says that the settlement rips off innocent investors and pension funds in order to reduce the banks’ costs of bailing out delinquent mortgage borrowers and others.  (As we noted earlier, the Justice Department, state attorneys general, and the biggest banks reached an agreement to provide $26 billion to delinquent mortgage borrowers and others, such as left-wing housing counseling similar to ACORN — in what the New York Post calls a “deadbeat bailout”).  As Simon notes,

“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 . . . 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. . .

Laurie Goodman . . . who has advocated for mortgage forgiveness in testimony to Congress, joined him in criticizing the agreement yesterday. . .“There is a difference between principal reductions and giving banks credit for spending others’ people money.”

As we noted earlier, by ripping off mortgage investors, this deal will make investing in mortgages more risky, which will in turn drive up interest rates that homebuyers have to pay in the future.  This deal only covers borrowers at certain banks, not those borrowers who mortgages are held by the government-sponsored mortgage giants Fannie Mae and Freddie Mac, which (unlike the private banks) have never repaid their bailout, and are currently still being bailed out at an ever-increasing tab of $170 billion.

This deal is not the only way that federal and state officials are messing up the housing market.  The Obama administration is forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. The Justice Department is suing banks that refuse to do so, and forcing them both to award preferential loans based on race, and to cough up money in “settlements,” some of which goes to left-wing “community” groups.

The Obama administration recently launched a multibillion dollar bailout for speculators. Bloomberg News reported that the administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners.  Speculators will benefit, because bailout recipients don’t even have to live in a house to get its mortgage principal reduced at taxpayer expense.

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