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William Dudley is an evil genius. In a speech, he said to prevent bail out of Banks holders of First Lien mortgage debt should take losses(Banks own the second Lien debt). To accomplish this he suggests we rewrite contract law to make 2nd lien holders senior to 1st lien holders, and ignores that banks have creditors(bond holders) who he decides should not be touched either.
To prevent a “bail-out” of lenders, Mr Dudley said that creditors should be required to reduce borrowers’ “excess debt” as a condition of taxpayer aid.
However, in a comment likely to displease investors in US mortgage bonds, the owners of borrowers’ first-lien debts should front the cost of reducing borrowers’ loan balances – rather than unsecured creditors such as second-lien holders and the owners of borrowers’ credit card debt, Mr Dudley said.
Investors in US mortgage bonds not guaranteed by US-controlled home loan groups Fannie Mae and Freddie Mac have consistently complained over the past few years that they have been forced to swallow losses while unsecured creditors, such as owners of second liens and credit card debt, have dodged them. Pimco, Blackrock and pension funds are among the investors that have raised objections.
“Mortgage contracts, servicing agreements and commercial code all recognise the priority of secured liens over unsecured liens,” said Joshua Rosner, a housing finance expert and managing director at independent research firm Graham Fisher & Co. “To recommend ignoring legal contracts, and give investor money to banks that own second liens because servicers have under-invested and can’t meet their obligations, is outrageous.”
The four largest mortgage servicers in the US – Bank of America, JPMorgan Chase, Wells Fargo and Citigroup – are also the largest owners of second-lien mortgages and home equity lines of credit.