Bond Fund Pimco Criticizes Foreclosure Fraud Settlement

Whose money is being used for writedowns? Bank of America entrance, Rockefeller Center (photo: Odaeus)

If Pimco, the giant bond fund, actually believes this, they can sue to block the foreclosure fraud settlement. But of course, nobody has seen terms, which would be kind of crucial to that circumstance:

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 […]

“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.”

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.

This grumbling could translate into action, and Pimco would be a major force in that. On any given security, you would need 25% of the investors in it to protest changes to the terms, if I’m not mistaken, and given Pimco’s stature, they would help make that happen for a number of securities. The banks have been loath to create actual lists of securities holders, which is why private litigants have gone through the process themselves.

The Pimco manager made this statement despite their general support of principal reductions, which is true of many investors. Laurie Goodman, the great analyst from Amherst Securities Group, explains.

“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.”

If she thinks that’s a problem, what about giving banks incentive payments as investors on bank-owned loans? Banks could make out either way. If they reduce principal on a bank-owned loan, they could call it a HAMP loan and get a payment of around 63 cents on the dollar. If they reduce principal on an private label MBS loan, they get to pay off part of the settlement with someone else’s money. Win-win.

But again, Pimco can do more than criticize. They can do something about it.

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