Recently, Deutsche Bank announced that it reached a settlement with the Department of Justice over the bank’s issuance and underwriting of residential mortgage-backed securities between 2005 and 2007.
While the government initially wanted $14 billion from Deutsche Bank, the settlement figure came in at roughly half that, just above $7 billion.
As part of the settlement, which is not yet finalized, Deutsche Bank will be required to provide $4.1 billion in consumer relief.
But a new report from Bloomberg suggests that Deutsche Bank is considering an unorthodox method of providing that $4.1 billion in consumer relief – lending to private equity firms.
Bloomberg’s Matt Scully has the story:
Germany’s biggest bank, dogged last year by questions about its capital levels, is exploring ways to avoid using its balance sheet to buy soured mortgages that it can partially forgive, according to a person with knowledge of the matter. One option it’s reviewing is to instead lend to firms like Lone Star Funds, which specialize in buying bad mortgages from government auctions and lowering consumers’ obligations.
As Scully notes, Lone Star Funds is a frequent buyer of delinquent loans from Fannie Mae, Freddie Mac, and the Federal Housing Administration.
For example, last July, Fannie Mae sold 4,537 loans with an aggregate unpaid principal balance of $746,438,433 to LSF9 Mortgage Holdings, a fund controlled Lone Star Funds.
Earlier in 2016, LSF9 Mortgage Holdings bought $516.6 million in unpaid principal balance from Freddie Mac. And in March, LSF9 Mortgage Holdings was the winning bidder for three NPL pools from Freddie Mac, which carried a cumulative unpaid principal balance of $822.6 million.
But as Scully also notes, there has already been blowback about the way that banks receive credit for their respective consumer relief obligations.
Here’s Scully again:
The borrower relief provisions of these settlements have garnered criticism from investors, community groups and others, which have said that the banks have not had to bear the burden of the aid offered. Bank of America Corp., for example, received credit for relief on loans it originally made but had sold, and that others had modified.
And now, Deutsche Bank is looking to private equity for credit for its own consumer relief obligations. For much more, click here or below.