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.