Via Yves Smith, Financial Times is reporting new developments in the talks between the nation’s five largest banks, 40+ state Attorneys General, and the Obama administration around robosigning and foreclosure fraud. Not so shockingly, the news isn’t good:

Investors in US home mortgage bonds may have to swallow losses as part of a wide-ranging settlement being discussed between leading banks and the Obama administration to resolve allegations of foreclosure misdeeds…

As a result, the five largest US mortgage servicers – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – would avoid some of the cost of the potential $25bn settlement…

According to the terms of the settlement currently under discussion, each of the banks involved will have to meet a certain dollar target to fulfil their end of the deal. Each dollar of reduced payments or overall loan balances would be treated like a credit. A dollar of principal reduction on loans held on the banks’ own books would get a higher credit – for example, 100 cents on the dollar – than reducing a dollar of loan principal on mortgages owned by bond investors.

The servicers would have to determine that a mortgage restructuring would be more beneficial to the investor than a foreclosure, and the contracts governing the mortgage securities would have to allow for loan modifications. Investors probably would have no say in the decision, according to people familiar with the matter.

The Financial Times also reports that, in contrast to logic, banks would mark off loans from their own books as opposed to loans owned by investors.

This is a really ridiculous supposition and course of events. Essentially what would almost certainly happen is that banks would have investors eat losses. Who are these investors? Well, in part, unions, public pensions, and senior citizens. To put it differently, the general public would be bailing out banks via their second lien mortgages.

Yves Smith points out that this would likely go towards higher value mortgages and leave many people out in the cold:

In fact, I can tell you exactly what will happen: all the mortgage mod money will come out of investors, and it will come out of the very biggest loans, since the bigger the loan, the fewer the number of mods the bank has to make (the cost of making a mod is not related to the size of the loan). So that means that this approach assures that the mods will go to comparatively few people in big ticket homes and will do nada to help middle and lower middle class people.

The AG settlement talks were already headed in a really ineffectual direction. But this development, if true, would be a massive step backwards away from even the patina of accountability for the banks’ illegal behavior.