The government’s deal with banks over their foreclosure practices after 16 months of investigations is cheap for the loan servicers while costly for bond investors including pension funds, according to Pacific Investment Management Co.’s Scott Simon.
In what the U.S. called the largest federal-state civil settlement in the nation’s history, five banks including Bank of America Corp. and JPMorgan Chase & Co. yesterday committed $20 billion in various forms of mortgage relief plus payments of $5 billion to state and federal governments.
“This was a relatively cheap resolution for the banks,” said Simon, the mortgage head at Pimco, which runs the world’s largest bond fund. “A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”
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Asset managers are frustrated with the deal because, in addition to the debt the banks own, it gives credit to the lenders for changes to loans they hold no interest in and oversee for investors. That “treats people’s 401(k)s and pensions,” which hold mortgage securities, “like perpetrators as opposed to victims,” Simon said. The deal comes after all 50 states announced a probe into foreclosures in 2010 following disclosures of faulty documents used to seize homes, costing bondholders as liquidations of bad debt were delayed.
“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that,’ ” Simon said yesterday in a telephone interview from Newport Beach, California.
Government officials say the costs will be “funded primarily by the banks, not third-party investors,” according to a statement posted yesterday on a website created for the settlement. The five banks will get different amounts of credit for various types of borrower aid, with loans in government- backed mortgage bonds exempted.
The $250 billion Pimco Total Return Fund last month was 50 percent invested in mortgage debt, typically government-backed securities, according to its disclosures. It also owns home-loan bonds in private funds for institutional clients.
Scott has said for more than two years that Pimco supports the greater use of principal cuts on debt that exceeds homes’ values. It isn’t clear how often reductions for individual borrowers sparked by yesterday’s deal will be large enough to help, he said.
Laurie Goodman, the Amherst Securities Group LP analyst who has advocated for mortgage forgiveness in testimony to Congress, joined him in criticizing the agreement yesterday.
“There is no one who has been more vocal in support of principal reduction than I have been,” she said in a telephone interview. “There is a difference between principal reductions and giving banks credit for spending others’ people money.”
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