(or perhaps, the reverse?)

Why the suits and huge potential fines? The timing pertained to a statute of limitations. But is there a subplot relating to a refinancing program?

The FHFA bank suit is aimed at 17 banks and recovering nearly $160B in losses based upon banks' faulty originating, securitizing and servicing of RMBSs. Because of these abuses, the tax payer had to bail out the GSEs. This is payback time.

Is there a connection between the FHFA's actions and the Boxer bill in the Senate to refinance 2 million mortgages? Boxer's bill has support from Republican Senator Johnny Isakson, GA. Obama's speech is rumored to contain major refinancing proposals.

Ed DeMarco, head of the Conservator, FHFA, which oversees the operations of Freddie Mac and Fanny Mae, has not given the Obama administration the support it has requested for refinancing programs. Some of the reasons, (let's forget DeMarco is a Bush appointee) are that refinancing, while it achieves laudable aims, is opposite the mandate of FHFA. Refinancing loans resets the meter of banks' former misdeeds, eliminating claims of breaches of reps and warranties. It can also reduce the value of retained portfolios of MBSs.(about $500B). And, if done in haste, new mortgages might compound the problem. (The total of Agency MBSs is about $5T.)

Aside from the sticky problems of the FHFA's mandate, Boxer's bill, and presumably its cousin, Obama's plan has great outcomes for the borrower, the economy at large, tax revenues, the real estate industry. Rapid refinancing, for loans underwater but folks who have been making their payments.  Forgiveness on loan to value ratios, elimination of up front fees. Lower payments.

Enter: Stage left, banks. Stage right, Bond holders.

Stage left. Banks have a bit of a problem. They hold 20% of MBS's, about $1T. Refinancing reduces the MBS asset because less interest is being paid. Also, B of A, for example, in many cases is holding a related second mortgage. If the original loan is admittedly underwater, what is the value of a home equity loan?

Stage right. Bond holders, including foreigners, own about $1T. These folks will take a hit, just like the banks. Let's assume that these bond holders somehow vote Republican--what's the incentive in having your portfolio reduced by a new government program. Of course many "investors" are pension funds--as usual its the pensioners who get the hit. (Forget that the U.S. Treasury and the Fed own $1T in MBSs)

So how is any of this related to the FHFA suit? A comprehensive settlement with FHFA might preclude the mountain of other litigation against the banks, allowing the mortgage mess to be sorted out. Penalties could flow to the GSEs to reduce the hit the tax payers took. Practices could be reformed. Reps and warranty claims could be forgiven, fines used wisely. New reforms would favor modifications over foreclosures. And a large wave of refinancing with 2 million borrowers who are underwater but are good payers could move forward. Banks might have to be honest about their assets but mountains of litigation are as depressing as bad assets.

It is possible that a large wave of refinancing, coupled with reform could solve many problems at once. But the refinancing cannot go against the mandate of the FHFA to properly regulate the GSEs. So we get back to the original questions of Mr. DeMarco and the FHFA. Why the large fines? What is the end game? 

And an even bigger question for Obama. Can I get a major refinance program to work?