The major mortgage lenders are looking at a $20 billion bill for their malfeasance in the foreclosure scandal. But a recent New York Times article pointed out that the deal is not all bad for the banks. That's because a proposed clause in the agreement between the mortgage banks and the federal government and state attorneys general would allow lenders to treat second mortgages the same as first mortgages.

The reason this is so beneficial to the banks is that it changes the rules about the order in which creditors can claim money from a mortgage debtor. In the boom housing market, many people took out second mortgages in the form of home equity loans, so the banks are on the hook for billions with those loans. In most foreclosure cases, the value of the second mortgages would be lost. But with the settlement proposal, it would be easier for the banks to get some of that money.

Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down "at least proportionately to the first." That would give the banks license to subvert the rules of payment hierarchy. The other alternative is to wipe out the second's value entirely, but given a choice, the banks would be extremely unlikely to take that option.

The proposal would be extremely generous to the second-lien holders. Who are they? Typically, they are major mortgage servicers. Who owns the mortgage servicers? The big banks.

The four biggest banks now have about $408 billion worth of second liens on their balance sheets. If the banks had to write these loans down substantially, acknowledging the true extent of their losses, they would have to raise capital - and might even teeter on the brink of insolvency.

Fort Lauderdale "stop foreclosure" attorneys are disappointed that just when it looked like the mortgage banks were about to be taught a lesson, it seems they have to be given a gift at the same time. In any case, the deal is not done yet. Perhaps negotiations will continue and the government entities will be tougher when it comes to the banks' interests in second mortgages.

New York Times "In Proposed Mortgage Fraud Settlement, a Gift to Big Banks" 3/16/2011