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Bank’s Hustling AGs and Consumers on Second Mortgages

Newwells-fargo-advertising Orleans Way back in the New York Times business section in sort of a snarky article by a ProPublica report (a nonprofit NYT outsourcer) a dangerous curtain was raised on the supposedly tough negotiations between the state attorneys general and the big banks about mortgage loan modifications.  Seems on an okey-doke, wink-and-a-nod, the deal might allow banks to pretend that second mortgage liens were not wiped out in a modification, so that they could protect their fragile balance sheets, which have led some outside experts to call many of these institutions “ghost banks” since they are mirages for money rather than holders of real assets.

I was crushed to read this.  First, I had touted the deal, based on the few emerging details, as finally providing real relief to desperate homeowners trying to hold onto their homes in the face the continuing recession.  Secondly, I had thought the unbought and unbowed AGs were finally breaking the co-dependency cycle of Wall Street-White House – Treasury Department, which has led to so little reform, so little relief, and now soaring bank stock prices and executive paychecks and dividend awards.   Finally, it is a terrible deal based on an agreement to call black white essentially, since all of the banks have long recognized that in reality these secondary liens were already wiped out.   I can remember a meeting with HSBC, a huge 2nd mortgage holder and financier in the suburbs of Chicago in late 2007 before the full level of the crises was front page news, and listening to them tell us they were going to have to wipe out the 2nd and were willing to do so to protect the firsts for themselves and others.  Those were gallant comments probably long forgotten as the red ink started flowing in rivers, but it was based on the “old school” understanding that you couldn’t keep an asset that was clearly not collectable.

Essentially what this report indicates is that the “deal” would allow banks and their servicers to keep the 2nd mortgages on their books and only reduce their value by the same proportion that they had written off on the first mortgage.  Clearly, this does NOT make the 2nd anymore collectible, especially because part of this reduction of the loan is conforming to the level that home prices are underwater, and may stay underwater for years, if not decades.

Does it matter?  Hell, yes!  Look at the prize the banks are wresting here:

“The top four banks now have about $408 billion worth of second liens on their balance sheets, according to Portales Partners, an independent research firm specializing in financial companies. Wells Fargo, for instance, has more money in second liens than it has tangible common equity, or the most solid form of capital. If banks had to write these loans down substantially, acknowledging the true extent of their losses, they would have to raise capital — and might even teeter on the brink of insolvency.”

The only good thing about this report is that now that it’s hit the light of day, hopefully there will be enough of an uproar to send the negotiators back to the table, because this is a too big of a bank holiday giveaway.

These second mortgages are history.  Let them blow away like the dust they are worth.