STOCK MARKET WATCH - Friday, 17 February 2012

[Demeter]

15. Is the $25 Billion Foreclosure Settlement a Stealth Bank Bailout?

http://business.time.com/2012/02/13/is-the-25-billion-foreclosure-settlement-a-stealth-bank-bailout/?xid=rss-topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+time/topstories+%28TIME:+Top+Stories%29&utm_content=Google+Reader#ixzz1mQCJ7RLi

(IMO, THERE'S NOTHING "STEALTHY" ABOUT IT--DEMETER)

Thursday’s $25 billion foreclosure settlement received praise from some consumer groups, but the reaction was not all positive. One detail of the deal that has raised questions and concerns is reports that the five major U.S. banks will get credit for principal reduction of mortgages they do not own. While the fine print of the plan has yet to be released, mortgage investors fear they will be forced to write down the value of their holdings.

So how would the big banks get credit for using other people’s money to pay for principal write-downs? The answer lies in the evolution of the way mortgages are financed. In the old days, when a home buyer wanted to buy a home, he took out a loan from his local bank. The savings and loan business model involved collecting deposits from the community and then loaning that money back out, at higher rates, to home buyers and other borrowers.

This model, however, left banks open to certain risks like regional economic downturns or rising interest rates. (The savings and loan crisis of the 1980s was an example of what can happen to this business model in an environment of rising interest rates.) So in the 1990s more and more lenders began to “securitize” mortgages; that is, they would sell the cash flows from their mortgages — the monthly principal and interest payments — to investors, while continuing to “service” those payments in exchange for fees.

Yes, these are the mortgage-backed securities that we’ve heard so much about for the past few years — but their affect on the recent foreclosure settlement is a new wrinkle. The problem is that the five major banks involved in the settlement service many mortgages, but it is unclear how many of these loans the banks actually own. Any kind of large scale principal write-down would have to include some cooperation with the investors that own the mortgages. But these investors were not responsible for the misdeeds that precipitated the settlement, so it seems unfair — and may not be legal — to force them to take losses when they weren’t the ones committing fraud.

Read more: BECAUSE THERE'S SO MUCH TO THIS, IT'S UNWORKABLE ON ITS FACE.