Guest Post: Who Is Really Paying The $25 Billion TBTF Mortgage Settlement

Tyler Durden's picture

Submitted by David Schawel of

Who Is Really Paying The $25 Billion TBTF Mortgage Settlement

The surprising tale that I will attempt to pen in this blog entry has a very familiar cast of characters; the Obama Administration, the Housing Bubble, "Toxic Mortgages", and Too Big To Fail "TBTF" Banks among others.  While the headline of TBTF banks in a $25bil mortgage settlement is known to many, the underlying details of the settlement are less known and quite appalling when you pull back the covers.

The wounds on past and present homeowners are still fresh from the housing crisis.  As Jonathan Laing points out in this weekend's Barron's cover story, "five million of the country's 76million mortgage holders have lost their homes to foreclosure or lender ordered short sales since 2006, and an estimated 14million more own more on their homes than their properties are currently worth.  In all, some $7.4 trillion in homeowners' equity has been destroyed according to Mark Zandi..." 

Cries for Accountability

While blame deserves to be cast upon numerous parties for the housing bubble, Americans have rightly called for accountability on the TBTF banks.  Accountability for what? Among other faults, robo-signing became prevalent among TBTF banks as they forged mortgage documents in order to ensure proper paperwork was done to foreclose on properties.

Details of the $25bil Settlement (in the words of HUD) & Public Lauding

"On February 9, the Department of Justice, the U.S. Department of Housing and Urban Development, other federal agencies, and 49 state attorneys general announced the largest federal and state settlement agreement in history with the five major mortgage servicers for their mortgage servicing practices. The agreement has the potential to help nearly two million American homeowners through a variety of means, including loss mitigation tools such as principal reduction and refinancing of loans for borrowers who owe more on their house than it is worth (“underwater” homeowners), payments of billions of dollars to federal and state parties, and payments directly to individuals who lost their homes to foreclosure and meet certain other criteria." The public seemed to buy right into this news.  After all, $25bil being paid by the bank sounds pretty tough right? Upon news of the $25bil Mortgage settlement many media members gushed over President Obama's "accountability" of these banks.  President Obama said himself that it was about “standing up for the American people” and “holding those who broke the law accountable.”

What's the Truth?

Only $5bil of the $25bil is actual cash being paid out by the banks.  The banks earn "credits" for the remaining $20bil by modifying either loans that they own on their own books or securitized private label MBS that they service. Which will they choose to modify?  Alison Frankel described the incentives last week in this article, "Banks receive a $1 credit for every dollar of principal they reduce in a loan they own outright. They earn a 45 cent credit for every dollar written down on a securitized loan. That incentive, in combination with the strictures of the pooling and servicing agreements with investors, was intended to limit the number of securitized mortgages the banks would modify."  The major question you should be asking yourself, and the overall premise of this article, is why are non-agency mortgage investors who did no harm being asked to foot the bill for the sins of the TBTF robo-signers?  If you were a bank holding a loan at par, would you rather modify a given loan and take a dollar for dollar capital hit to get a credit towards the $20bil bogey, or modify twice as much of a MBS holders loan that you service (taking no capital hit yourself) and get the same credit?  As former SIGTARP Neil Barofsky tells Bloomberg, "this would be comical if it wasn't so tragic".

Massive 1st Lien vs 2nd Lien Conflict of Interest-  It isn't even as simple as an "all else equal" decision for banks. Frankel continued to hit the nail on the head "Most securitized mortgages, remember, are first-lien loans. The vast majority of second-lien loans, by contrast, are bank-owned. When banks reduce the principal in a first-lien mortgage, they improve their own prospects as a second-lien holder....The Association of Mortgage Investors highlighted the conflict between first and second lien owners in a statement issued immediately after the settlement documents were released. "The settlement is expected to also draw billions of dollars from those not a party to the settlement (because) it places first and second lien priority in conflict with its original construct," the AMI press release said. "It is unfair to settle claims against the robosigners with other people's funds." 

Curious Responses By HUD, Frustration for Main Street Investors

-On a mid-February conference call, the HUD's secretary Sean Donovan reportedly promised the MBS bondholders on the call that a maximum of 15% of modified loans by the five banks could be on securitized loans.  Others were under the impression that the final settlement would have this 15% cap in writing.  Needless to say, when the final report was released, there was no sign of any limit.  "If we've missed (documentation of the 15 percent cap), please Secretary Donovan, let us know where it is," said Vincent Fiorillo, a portfolio manager at DoubleLine Capital and president of the board of the Association of Mortgage Investors.

-Just this past week, and presumably in response to heat they are feeling, the HUD put out a "Myth vs Fact" blog post on the HUD website. A few curious statements are written within the modifications within securitized trusts section including:

"...principal write down modifications must be NPV positive...".  If these loans are NPV positive, shouldn't they have been modified already?

"...Fourth, 2nd liens are written down according to HAMP 2MP. Fifth, 2nd liens greater than 180 days delinquent are extinguished." 

Why is it even a question of whether 1st liens or 2nd liens should be extinguished first?  Further, there are ways for banks to avoid having 180 day delinquent loans in second liens. They can either change the amortization to negative-am or simply advance to make them current.

-The AMI, Association for Mortgage Investors, reportedly reached out to numerous Attorney Generals with no success.  It's easy to see the frustrations of this organization which represents pension funds, mutual funds common in 401k plans etc...As they write on their website, "AMI supports long-term, effective, sustainable solutions to the housing foreclosure crisis. It is generally supportive of a settlement if it ensures that responsible borrowers are treated fairly throughout the foreclosure process; while at the same time providing clarity as to investor rights and servicer responsibilities. The ultimate settlement should ensure that our clients, who were not involved in the alleged activities and, who likewise were not a participant in any negotiations, do not bear the cost of the settlement. Specifically, mortgage servicers, if at all, should only receive limited, reasonable credit for modifying mortgages held by third parties, which are often pension plans, 401K plans, endowments and “Main Street” mutual funds. To do otherwise, will damage the RMBS markets further and limit the ability of average Americans to obtain credit for homes for generations to come."  I'd have to take the side of AMI here as it appears that they are willing to work with the AG's, HUD, and the White House to find the best solution possible.

Detrimental to Resumption of Private-Label Mortgage Finance?

The irony of this whole debacle might be that the AG's and Obama Administration could be missing "the forest for the trees".  With private-label mortgage investors potentially bearing the costs of this settlement, could this shake the confidence of a resumption of private label origination?  The GSE's have been under fire and continuous cries have been heard for the eventual wind down, if not at least a reduction of the reliance upon them  A healthy private MBS market would be essential to any move away from nearly complete reliance on the GSE's.  Placing the costs of the settlement on the very investors who are an integral part of the private label MBS market is NOT a way to instill confidence.


It's hard to believe that such decisions are being made on such a hot button issue.  I suppose the general public sees the $25bil stick and assumes the Banks are being appropriately punished.  In reality it is quite the scam.  The Attorney Generals and White House look like they are dropping the hammer on evil Wall Street TBTF banks while simultaneously sticking up for the average American borrower.  The banks pretend they're paying the price for past sins (with the money of the victims, the investors).

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tom a taxpayer's picture

Hard to believe but the AGs are now part of the cover-up. For the AGs to do nothing about Wall Street's rampant criminality is one thing, but for the AGs to foist this slimey settlement off as "justice" is an outrageous cover-up. What the AGs are trying to cover-up is their gross dereliction of duty for not prosecuting the TBTF RICO criminal enterprise.  The AGs do not have a single hair on their balls or vagina… not a modicum of testicular fortitude or vaginal vigor to launch criminal prosecutions of the greatest financial crimes in U.S. history. 

Flakmeister's picture


We are a banana republic now...

oogs66's picture

AG's want wall street jobs too.

smlbizman's picture


you cant just broad brush all was only may give people the wrong impression

chunga's picture

"E. Scott Pruitt" from Oklahoma was the lone maverick Attorney General...

He thought the "settlement" was too tough on the bankster

Kali's picture

Not sheeple, PORK!

LIke we didn't know that was gonna happen anyway.

StychoKiller's picture

[quote] The Attorney Generals and White House look like they are dropping the hammer on evil Wall Street TBTF banks while simultaneously sticking up for the average American borrower.  The banks pretend they're paying the price for past sins (with the money of the victims, the investors). [/quote]

Furthermore, the banks needed some free munny to buy the next Clowngress -- win-win for them, everyone playing by the rulez is getting shafted more than one way!

dbomb12's picture

You are correct, lets see whats behind door # 1, JACKPOT more funny munny

oogs66's picture

So sick of TBTF. Let them fail!!!!

Below Zero's picture

This is America. Things like this just don't happen here. This  must be a mistake.....

t_kAyk's picture

this isn't america, this is imagination land. 

RockyRacoon's picture

Is anyone surprised... really?   The devil is always in the details, and that devil wears a three-piece suit... Gucci loafers, cufflinks.  You get the picture.

Jendrzejczyk's picture


I must be the most gullible person alive because I'm continually suprised by all the graft, greed, cronyism and corruption.

RockyRacoon's picture

I'm just old.  Seen it all before.

LouisDega's picture

I'm paying for it.

Atlantis Consigliore's picture

what do you call 1 million realtors unemployed, bankrupt, and living the street life?

a good start at what goes around, comes around....

what do you call 1 million lawyers chained together at the bottom of the ocean....

not enough, keep throwing them in....

luna_man's picture



"Atlantis Consigliore"


So far, So good...Should we take prisoners?

Caviar Emptor's picture

Instead of the banks marking down or writing off, taxpayers are making up the difference. They don't realise that it's biflationary to subsidize housing costs: costs kept out of reach of household earning power

Boxed Merlot's picture

This is not rocket science.  The crime has a name, it's called "Accounting Control Fraud".  It's not as difficult to understand as the perps would like us to think.

“The elite financial frauds are treating the United States of America’s criminal justice system and financial markets with utter contempt. They believe they can become wealthy – with impunity – through frauds that cost U.S. households $11 trillion dollars and cost seven million Americans their jobs. Not a single elite fraudster who was instrumental in making the millions of fraudulent loans that drove the crisis has even been indicted – over seven years after the FBI’s September 2004 warnings that there was an “epidemic” of mortgage fraud that would cause a financial “crisis” if it were not stopped. Here is how bad the situation has become. The firms that specialized in making huge amounts of “stated income” loans called such loans “liar’s loans.” This was publicly reported – and nothing effective was done by the markets, by self-regulation, by federal regulators, or by federal prosecutors to stop frauds that were as brazen as they were massive.”

"Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors.

“It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.

Wagner has confused himself with his pronouns. “They” refers to the CEO. “Themselves” refers to the bank. The CEO has a “sure thing” – he can grow wealthy very quickly by looting the bank through the accounting fraud recipe. He is not looting himself. The title of George Akerlof and Paul Romer’s famous 1993 article (“Looting: the Economic Underworld of Bankruptcy for Profit”) says it all. The CEO is quickly enriched by looting “his” bank. Akerlof and Romer emphasized that accounting control fraud is a “sure thing.”"... 

William Black



New Economic Perspectives

Senator Grassley Calls Attorney General Holder’s Bluff

Posted 3/14/12 by Mitch Green 


Until the ceo / cfo / coo of these firms that initiated these fraudulent devices are held to account for each and every criminal liar loan they allowed to filter through their organizations, the US will continue to absorb the ridicule, disdain and expense these enemies of the state have unleashed on our sovereignty.  Any government official, agency employee or appointee that refuses to use the vast wealth of data available to track their nefarious activities and present the facts to an open, fair and non partisan judicial hearing should be summarily removed from office and charged with treason.  Period.



Where's J. Corzine?

dick cheneys ghost's picture

Wanna know why they call it Wall Street?


Cause FUCK YOU was already taken....



Barofsky on bloomberg about the same deal....

Zero Govt's picture

What a bloody shambles

Fraud, counterfeiting, ratings fraud, usurping State Law, documentary incompetence, bankers bonuses

Anyone arrested yet? ..interviewed?? ...witness statement???

And what of the US Govt who have now pissed away $Trillions just on the mess created of their own intervention, let alone all the $Billions on subsides over the decades this criminal mess was created

Barney Frank still in office? ...Housing Committee still sipping tea?? ..any clawbacks on Fanny and Freddie executives multi-million wage packets, pensions, resumes???

..not a single scumbag made accountable in 3 years. 'Democracy' and the Law, you can bin the lot.

Everything Govt (and Wall Street) touches turns to crap 

dick cheneys ghost's picture

The cops are too busy arresting protesters in zucatti park

Chartist's picture

Good read Tyler, but isn't it "attorneys general"?

StychoKiller's picture

No, it should be M@%#$$Fscking sellouts!

dick cheneys ghost's picture

BTW, love the "Suggar Daddy' ads running on the site.........its like soft porn

Seasmoke's picture

i have clicked over a hundered times but yet to find even one baby who i would like to be daddy

Clycntct's picture

I'm not saaying I know how to spaeyl, but this stood out.

"4million more own more"

dick cheneys ghost's picture

Weidner law on the $25 billion mortgage settlement....from 3 days ago

chunga's picture

That's great fun.

Unfortunately, it won't be possible to yap this away with exciting youtube videos or facebook rants.

The "settlement" has to be sued.

I found this sample lawsuit prepared to do just that.


This will have to be done Pro Se apparently, because I'm sorry to say the only thing coming from these lawyers is sensational talk.

With all due respect, I think a lot of these lawyers hand in their balls in exchange for their Bar cards.

Pisses me right the fuck off.

chunga's picture

Replying to myself but this makes me very angry. I posted the notion of suing the AGs on Weidner's site and it was filtered away.

There is only ONE lawyer that has the balls to do this and his name is George Babcock.

He runs a little store-front shop and has more balls than all of them combined.

By himself he has almost 300 cases jammed in Federal Court. How many Federal "Stay Orders" does Weidner have under his belt? One? None?

Skip past all the color commentary in the hamlet post and look what got filed late last week. I pulled it from PACER. He doesn't play nice; and why the fuck should he??


No. I don't work for the guy but I damn well wish I did.

q99x2's picture

Moral of the story: Missing. But the advice is "Don't do business with TBTFs" ever.

Dingleberry's picture

25 billion.....and NO criminal charges. Where have I seen this movie before? perhaps it was "investment banking" or pharma, or energy companies, or....(fill in the blank).  Fines are just a cost of doing business.  Absolutely disgusting.

FEDbuster's picture

A "fine" that you only have to pay 20% of?  The "cost of doing business" is a lot cheaper, if you are a bankster running the government.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
- Napoleon Bonaparte, 1815

peekcrackers's picture

In the U S they dont kiss you before you get fucked

Miss Expectations's picture

Quick, cancel the servicing agreements.


loveyajimbo's picture

Where is Judge Rakoff?? Unfortunate name, but he should run for President... He would void this entire abortion of "justice"...  The country is poisoned with corruption top to bottom... what the hell to do?  Any of my ideas as to taking care of the crooks like Blankfein and Dimon, etc, etc are illegal... They tarred and feathered that good man Ron Paul... and the rest are crooks... maybe Newt?  Hey, a goat in a herd of diseased pigs looks pretty good...

Flakmeister's picture

Off topic but an absolute top shelf article on Saudi Oil Production:


bankonzhongguo's picture

Considering the amount of money made through POMO and the spread on ZIRP, the banks are not out anything.

The "settlement" merely gave those banks protection from criminal charges.

The banks are laughing at us.

Expect a new wave of foreclosures now that they are protected.


Ned Zeppelin's picture

Yes, if some reason you needed more evidence of the pervasive efficacy of the coup d'etat which became fully operational in October 2008 this is it.  Friends, I hate to say it - truly I do, but it's so over it's not even slightly funny. The Empire is fully in control, and those of you/us who daydream of truth, justice and the rule of law need to understand that is simply not happening no fucking chance.    Obama is part and parcel of this, as was Bush, as was Clinton, as will be either Obama or Romney.  It's really over, Johnny.

Only an outside event - the Black Swan - has the potential to have reality return. It will, of course.  But until then, don't waste your time griping about these criminal acts, you are wasting your time better spent with your loved ones and preparing for the daywhen TPTB are overwhelmed by some event.  Till then - BTFD - you might as well. 

Perhaps the Federalist Papers need an epilogue chapter.  "What We Missed."

Westcoastliberal's picture

I agree on the coup d'etat but that occurred either in Nov 1963 or Nov 2000, depending on whose history you prefer. Personally I think it's happened twice and right now the neo-cons are still in charge with Cheney at the helm.

I'll not be happy until all the MFers are in prison, including all members of Con-gress who voted for the NDAA.

This country is in shit-shape and it doesn't matter which party wins "elections" because they're only for show.

Boxed Merlot's picture

It's hard to believe that for all the NSA data collected over the years and their ability to determine what I had for lunch on Aug. 14, 2006 they can't reconstruct who was at the helm of these institutions that oversaw the largest Accounting Control Fraud yet to occur?

Not only can they show the evidence of the crimes themselves, but these individuals records can be traced to show the compensation they received, doled out and where it is to this day., Yet people are more concerned the brown shirted NSA will knock on their door for talking about their, (the NSA’s), malfeasance.


We’re certainly not in Kansas anymore.


Kali's picture

they raise a lot of PORK in Kansas, don't they?

FEDbuster's picture

You would think the NSA, FBI, SEC, CFTC, CIA, Interpol, etc.... could help Jon Corzine remember where the $1+billion in customer funds went, after they were stolen at MFG? 

A Lunatic's picture

I think you meant paltry 25 billion mortgage settlement.

Lester's picture

It is the criminality of the mortgage and banking companies that is responsible for the housing value decline.  All those in the know realized their practices would cause collapse and loss throughout the Nation, thus the market values years earlier began dropping and then plummeted.

Ever since the go-go years post-WWII, housing of the single-family residence variety was touted and built-up and recognized as the "largest single asset" of most citizens.  Even them mega-mansion buyer owners were beat-up severely with this shit.  How much aggregated wealth was destroyed due to the indiference and cheapskate practices of these mortgage holders and the Law Firms who advised them on securitizing and not sustaining title-chains?

All these fucks are accountable.
Like there any attorneys who don't realize the FRAUD they have been perpetrating ever since the UCC and other Codes were permitted to quietly replace and supersed Common Law and Constitutional Viability in the Nation's Courts???

All these fucks have fed like vampires upon The American People.

The retribution will be heavy.  Deservedly so.

FEDbuster's picture

Don't forget the hundreds of billions of dollars that they screwed your local county recorders out of with their MERS system.  By not doing proper transfer and recordings of mortgage documents, they avoided paying all the transfer fees charged by county recorders.  I hope the county governments band together in a class action lawsuit and sue the life out of all the banksters that participated in MERS for back fees owed and penalties. 

Lester's picture

Seen any property tax adjustments downward?

Hell no!


The county bastards KNOW there is no market and that every house/property that wasn't paid for in cash, or mortgaged privately potentially has a title-cloud.  These properties cannot be sold and are essentially worthless until the titles are PROVEN to be clear.

This task would take generations to solve.
All we common-folk are is steaks on their tables to be cut-up to order...

FEDbuster's picture

Actually we have seen some small reductions in actual property taxes here in AZ.  They don't reflect the 50% drop in values, but they are down 5-10%.  The assessed values are down 30-50%, but the rates have gone up to compensate.  Many bonds allow for this, they have to get a certain amount of money to make the payments.  As a property owner, you are a sitting duck for the tax man. 

The banksters own county governments billions in non-payment of transfer and recording fees (due to MERS).  The problem is no single county recorder has the means or the balls to bring suit against the banksters.  That's why they have to band together in a class action lawsuit.