The legal settlement among investment banks who sold mortgage-backed securities and state attorneys general is ambling toward a conclusion. The negotiated fines are $25 billion, the largest civil settlement in U.S. history. These include $20 billion for restructuring, refinancing and loan forgiveness for current homeowners, and $5 billion to states, apparently to compensate homeowners harmed by irregular foreclosure procedures.
The Bloomberg article does not make the source of the funds for the settlement clear, though it does quote a Association of Mortgage Investors statement that anticipates that holders of the securities backed b y the mortgages will bear much of the cost. This has lead PIMCO to leave the American Securitization Forum in protest (as reported in Investment News).
Meanwhile, The Wall Street Journal reports that a civil trial between of Citigroup relating to a $1 billion mortgage backed bond is in limbo. An appeals court is considering overturning an earlier ruling order the trial, rather than accepting a settlement and fine.
What's interesting is that more attention and concern is being paid to irregular foreclosure procedures than inadequate disclosure accompanying the issuance of the mortgage backed securities. I understand the populism involved in the state charges against the banks and servicers. However, I have yet to hear of widespread foreclosures in which homeowners were actually current with all terms of the mortgage. Yes, there are cases of improper procedures, but the loan was in default and a foreclosure was inevitable. Damages should be hundreds, not hundreds of thousands, of dollars.
On the other hand, the state and municipal retirement plans are big investors in the bonds, and sustained significant losses. Taxpayers are on the hook for any pension shortfalls due to underestimation of the risks involved in the bonds. Now these funds (along with other investors) are about to finance the the restructuring of loans for defaulting homeowners. Talk about irony.
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