Turn On The Lights, Watch The Roaches Scatter Part 62

All of a sudden, the mortgage industry just got an exit pass from Foreclosuregate.

The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars.

Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said.

If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said.

Now keep in mind the $20 billion number is the industry-wide settlement figure.   In other words, this is the number the banks are supposed to take because the alternative is going to be much, much, much worse for them.  And hey, guess who would in charge of giving out the principal reductions?

The deal wouldn't create any new government programs to reduce principal. Instead, it would allow banks to devise their own modifications or use existing government programs, people familiar with the matter said. Banks would also have to reduce second-lien mortgages when first mortgages are modified.

Oh yeah, I see this working beautifully.  For the banks.

Under the administration's proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors. The settlement proposal focuses on pushing servicers who mishandled foreclosure procedures to eat losses, by writing down loans that they service on behalf of clients. Those clients include mortgage-finance giants Fannie Mae and Freddie Mac, as well as investors in loans that were securitized by Wall Street firms.

Bank executives say principal cuts don't necessarily improve payment patterns, and have told other parties involved in the talks that principal reductions could raise new complications. First, it will be difficult to determine who gets reductions and who doesn't. And even if banks agree to a $20 billion penalty, the number of mortgages that can be cured with that number is limited, one of these people said.

If a single settlement can't be reached, different federal agencies could seek smaller penalties through regular enforcement channels, and banks could face the prospect of separate civil actions from state attorneys general.

Any settlement could be one of the largest to hit the mortgage industry. In 2008, Bank of America agreed to a settlement valued at more than $8.6 billion related to alleged predatory lending practices by Countrywide Finance Corp., which it acquired that year. 

Yeah, you are beginning to see why the banks might actually jump at the $20 billion to forever be off the hook on these faulty mortgages.  This is the Obama administration bulldozing the mess under the carpet.   "Oh please don't make us pay $20 billion split among 14 servicers when each one of us would easily be facing that number or much more separately!"

Pretty smooth plan.  10 million homeowners get $2,000 off their mortgage, the banks get legal indemnity from the mess, and Obama looks like a hero.  Of course, when you're $50,000 underwater, two grand isn't a lifeline, it's only a slightly better toss of the life preserver that's now a 245 yard swim away rather than a 250 yard one.

I honestly hope the banks get all huffy on this and pass, because this is about the worst idea I've seen the Obama administration come up with so far.