Unintended Consequences: Banks may refi healthy loans

The many-armed bailout monster has shown yet another appendage. This time, it looks like the government may have inadvertently created incentives for big banks to renegotiate perfectly good loans and collect another round of fees. Further, it may enable second lien lenders to elbow their way ahead of first lien lenders. Only in the United States, kids, only in the United States.

But there is another smaller aspect to the Treasury plan that is beginning to chill those who own securities tied to many of the mortgages sold during the real estate boom. Under the guidelines announced Mar. 4, four of the largest U.S. banks may have an incentive to modify even currently performing loans as a way to boost fee and servicing income.

New Bank Powers Concern Wall Street – BusinessWeek

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One thought on “Unintended Consequences: Banks may refi healthy loans

  1. Refinancing good loans with new loans is fine if the borrower is better off in terms of a lower mortgage payment or better terms.

    I do not see much of a practical issue in terms of the 2nd loans. They will remain in second position and then get paid off when the new first is put in place. There is no useful way for a 2nd to become a 1st if we are talking about a refinance.

    There likely will be a trend to more fixed loans and fewer ARMs with nasty resets. That is also a good thing.

    Banks earning fees because they provide fresh financing that is better than what is being replaced is fine. It will even help recapitalize the banks. A borrower getting a direct benefit while the bank makes some money is better than just a bank bailout with taxpayer funds.

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