Let the banks dance this way: the outcome is normally fine, and no one is being unfairly taken advantage of. The AGs’ settlement seeks to enforce basic decency in mortgage servicing; it shouldn’t also try to enforce dubious policy on second liens.

UPDATE: In the comments, ErnieD and Jesse Eisinger explain what the issue is here. The banks securitized the first liens, but they own the second liens. So modifying a first lien costs them much less than writing down a second lien. In that situation, there’s a big conflict of interest at servicers, which are owned by banks, and have a financial interest in transferring too much value from the first lien holders to the second lien holders.

This is a good point, but I’m still not convinced that the AGs’ settlement is the right and proper place to address it. Servicers are treating borrowers badly, and the settlement addresses that. On top of that, they may or may not be treating bondholders badly, too. Trying to address that issue simultaneously I think makes an already-complex agreement so hard to construct that it would never see the light of day.

Felix Salmon is an Audit contributor. He's also the finance blogger for Reuters; this post can also be found at Reuters.com.