Deutsche Bank eases settlement burden

Bank can pay down part of its $7.2b penalty by lending money to fund managers

Deutsche Bank sought an unusual provision in its $7.2 billion (Dh26.4 billion) mortgage-bond settlement with the US government, and seems to have ended up winning it: the bank can pay down part of its penalty by lending money to fund managers.

As part of the agreement, Germany’s largest bank has to provide $4.1 billion of relief for mortgage borrowers. Other lenders that reached similar accords with the US have also had consumer obligations, which they have usually met by easing terms on loans that they made, or that they bought.

Those banks often got credit for relief even if they no longer owned the mortgages or collected payments on them, and losses were borne by fund managers. That sparked criticism from consumer advocates who said the borrower relief figures inflated the sense of pain that lenders truly bore in agreements over the sub-prime mortgage bonds that helped trigger the financial crisis a decade ago.

The Deutsche Bank deal seems to go one step further: it allows the German lender to finance other firms that buy nonperforming loans on the cheap and that restructure them for profit. That provision appears in two footnotes in the more than 110 pages of settlement documents, and says the bank will get credit for “financing arrangements” that it offers to other firms that can modify and make mortgages. Those firms may include private equity funds or mortgage payment collectors known as servicers.

New provision

The lender sought that provision in part because it doesn’t have retail mortgage operations in the US to supply it with soured loans, and has a strained balance sheet that makes buying billions of dollars of home loans difficult. Other banks didn’t have that language included in their agreements, including the Credit Suisse Group AG accord that the government released last week, according to a Bloomberg examination of major lenders’ settlement documents.