Mortgage bondholders are threatening legal action over the $25 billion national mortgage settlement, which will give the five largest servicers credits for principal writedowns that the bondholders may take.

The settlement's final terms, released last week, offer banks incentives to write down the principal of loans they own themselves and of loans held in securitized trusts. Investors in those trusts were not a party to the settlement agreement. Now they are objecting to being forced into taking losses — to the banks' benefit — as a result of it

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