Banks Win Big Reprieve

Kimberly Miller, Palm Beach Post

Bank of America Corp. (BAC)Wells Fargo & Co. (WFC) and three other banks that settled a nationwide probe of foreclosure practices this month will get a bonus from the deal: protection for $308 billion ofhome-equity loans they hold.

The banks that service about half the nation’s mortgages on behalf of investors will be able to share losses on their junior loans with bondholders and get credit toward the cash they pledged to spend in the settlement, said an Obama administration official involved in drafting the $25 billion agreement. Second liens would typically be wiped out before senior-mortgage investors take a loss, said Laurie Goodman, managing director at Amherst Securities Group LP in New York.

It’s “a gift to the banks, at investors’ expense,” said Goodman, a member of the Fixed Income Analysts Society’s Hall of Fame. “A proportionate write-down of the first and second represents a reversal of normal lien priority.”

Loss-sharing will break the logjam that occurs when banks drag their feet processing modifications on mortgages that outrank their junior liens, said the Obama official, who declined to be identified because this arrangement hasn’t been made public. Government foreclosure-prevention programs have resulted in less than 1 million modifications, a quarter of the goal the administration set three years ago. Home-equity mortgages have been a reason for that, said Arthur Wilmarth, a professor at George Washington University Law School in Washington.

Roadblock to Modifications

“The roadblock to getting comprehensive modifications has been the efforts of these banks, the biggest servicers, to protect their second liens,” Wilmarth said. “To only suffer losses on an equal basis as first-lien investors is a good outcome for them.”

The servicer agreement resolved state and federal probes into foreclosure abuses including robo-signing, the fraudulent endorsement of court documents. The banks have pledged $20 billion in various forms of mortgage relief, including principal reductions, plus payments of $5 billion to state and federal governments.

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