Blog on the Run: Reloaded

Wednesday, July 6, 2011 8:00 pm

BAC: Dead bank walking, feeding on the brains of the living

Filed under: I want my money back. — Lex @ 8:00 pm
Tags: , ,

I don’t know who Abigail Field is other than a “contributor” (which I presume means freelancer) for Fortune.com, but, boy howdy, did she find out something interesting about Bank of America’s Countrywide holdings:

Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini, operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor’s mortgage. Instead, her testimony was key to the judge’s ruling that Bank of America (BAC) couldn’t foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts. …

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical — and 104 out of 104 suggests it is — the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.

The lack of Countrywide endorsements also corroborates DeMartini, who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank’s database.

Bank of America has argued that, really, everything was just fine. Only now comes word that it will be taking a settlement … and quite a nifty one at that:

BofA will pay $8.5 billion to a group of institutional investors to settle claims that the bank violated the representations and warranties when they sold the RMBS [residential mortgage-backed securities — Lex]. They will additionally, according to their press release, “record an additional $5.5 billion provision to its representations and warranties liability for both Government-Sponsored Enterprises (GSE) and non-GSE exposures in the second quarter of 2011.” So that’s a total of $14 billion.

What’s most interesting here is that Bank of America makes this settlement with the trustee for the trusts, the Bank of New York Mellon. And they’re claiming that this will resolve almost all of their Countrywide-issued RMBS, which had an original unpaid principal balance of $424 billion. …

If this holds, and all $424 billion is settled, that would represent 2-3 cents on the dollar. It would be a pretty raw deal for the investors, considering that Countrywide has been accused of not following procedures of conveying assets to the trusts, creating “non-mortgage backed securities.” Yves Smith has argued that these cases are incredibly hard to prove in court, but even she expected a settlement avoiding trial to cost in the range of 10-15 cents on the dollar. It seems like the bank is trying to sucker the public into believing that they are making a major concession with a giant settlement, when they would be wrapping up a lot of their legacy exposure relatively cheaply.

The aforementioned Yves Smith, who has covered this story as closely as anyone, says this sucks:

The so-called Bank of America settlement, in which the Charlotte bank is set to pay $8.5 billion (plus some additional expenses) to settle representation and warranty liability on 530 mortgage trusts representing $424 billion of par value, is being hailed as a possible template for other mortgage issuers and servicers.

I sure hope not, because some of the things I see in this deal look plenty troubling. …

The investors had to overcome procedural issues even to be able to litigate. And MBIA, which is suing over similar issues but didn’t have the procedural impediments, is three years into litigation with Countrywide and is not very far along. This sort of case is a war of attrition and as a result, as we have indicated, even if the facts are lousy, there is reason to think that an eventual settlement would not be all that large even relative to the value of loans being disputed (the investors need to prove not only that the reps and warranties occurred, but that they led to losses. A lot of defaults, particularly post the subprime resets, are due to job losses and reductions in income. They can’t be blamed on failing to live up to the reps and warranties).

So with all these considerations arguing for fighting a few more rounds, and BofA in the past taking a very aggressive posture on disputing these cases, why would it settle? …

Put it simply: BofA can judge what its risks are VASTLY better than the investors. There are a lot of reasons why it would make sense for BofA not to settle now. Yet it was all over this like a cheap suit. That says it must regard this settlement as a real bargain.

I understand that when all the legal, definitional and procedural nuances are threaded, BAC’s actual liability on the Countrywide acquisition would not have been $424 billion. But it still would have been a helluva lot — keep in mind that title chain was flawed in 104 out of 104 randomly selected cases of securitized mortgages examined by Fortune. It’s not impossible that the liability would dwarf the company’s market capitalization (a shade under $110B as I write), which would mean, in a world where the rule of law obtained, the death of the company.

That is not, of course, the world we live in.

Advertisements

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: