Banks to take a hit on US home loans

(From the ft.com) Investors in US home mortgage securities will be forced to write down a “substantial” amount of principal – up to $40bn – for distressed borrowers as part of a national settlement against leading US banks to resolve allegations of widespread foreclosure abuses, the Obama administration has said.

The move would act as a “down payment” for future principal reduction initiatives that result from expected settlements between financial companies and the US government, said Shaun Donovan, US housing secretary, during a weekend conference call with reporters.

The Obama administration, which recently announced the formation of a new state and federal unit to investigate alleged frauds involving home loans and mortgage-backed securities, intends to use the threat of litigation against large US financial institutions to extract additional aid for struggling borrowers, Mr Donovan said.

“We believe not only that bringing state and federal powers gives us the ability to create real accountability at a scale that we have not seen to date, but also?.?.?.?there is the opportunity to get very large-scale relief, including serious principal reduction, for families that have been victims of the crisis,” Mr Donovan said.

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