As dramatic as this headline sounds, there is much less here than meets the eye. In addition, either the article that discussed this development is confused, or the underlying legal pressure is not well framed.
First, let’s get to the report, which certainly sounds serious. BusinessWeek reports that PIMCO, BlackRock, and the New York Fed are pushing Bank of America to repurchase the delinquent mortgages underlying $47 billion of bonds:
Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit.
Note several things before we go any further: first, this is NOT litigation, it’s a mere nastygram. Second, this is almost certain to be a new strategy in a effort mounted by an investor group (presumably now identified to turn up the heat on BofA) which so far has gotten nowhere. An unidentified group tried pressuring the trustee of a similar amount of bonds to direct the repurchase of loans gone bad. The trustee said it wasn’t going to do anything. So now the same line is being tried on the servicer, Countrywiide, this time alleging that it is Countrywide’s responsibility to buy back the loans.
Also observe that the argument is that the Bank of America Countrywide unit violated its servicing obligations:
Countrywide also hasn’t met its contractual obligations as a servicer because it hasn’t asked for repurchases itself and is taking too long with foreclosures, either because of document or process mistakes or because it doesn’t have enough staff to evaluate borrowers for loan modifications, Patrick said. If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default of its contracts, she said.
This part verges on comical. As much as we support the idea of having more servicers do loan mods (and having an investor group push for loan mods vitiates one of the servicer excuses, that investors will protest), this legal strategy looks barmy. First, Countrywide can demand repurchases only in the case of origination defects. Even though those arguably took place, given the recent revelation in FCIC testimony that pre-sale examination of many subprime pools revealed that the a significant portion of loans fell short of the stipulated standards, that fact set does not map into a neat or lucrative legal action. This is considered to be what is called a representation and warranty breach; they are costly to fight and don’t produce large settlements because the plaintiffs have to argue their case on a loan-by-loan basis and prove each default was the result of bad underwriting, not expected losses (remember these were risky loans) or bad luck (much higher than expected unemployment). The cost of loan-by-loan analysis means any litigation is very expensive and burdensome to win.
In addition, Countrywide did not make the reps and warranties about the loans, so its liability is going to be far less than the liability of the originator. However, the legal strategy appears to be to demand Countrywide put the breached loans (assuming a breach) back to the seller and, when they fail to do that, to sue them for breach of contract.
The odds are high that Countrywide was the seller of the loans – they issued many deals themselves.
The absurdity of this strategy is that they are asking Countrywide as servicer to put the loans back to Countrywide as seller.
And the second argument, that Countrywide has been slow to foreclose, may be true but would also be a slog to prove this is Countrywide’s fault, since court dockets are jammed and foreclosure times have slowed down across all servicers.
So the thrust here seems to be to threaten to fire Countrywide as servicer. How serious a threat is this? Answer: not at all. To fire Countrywide, the investor group would need to have a replacement. Servicing mortgage pools with meaningful delinquencies (meaning just about any pool, and ones with big losses like the ones at issue are even worse) are massively cash flow negative to a servicer. Why? The servicer has to advance principal and interest to the investors when the borrower quits paying. In theory, it does so until the loan is deemed “irrecoverable”; in practice, per Tom Adams, who has spent his career in securitizations, it is until the advances equal the original loan amount. The servicer’s only way to get itself reimbursed is through foreclosures (we also believe they are dipping into other principal repayments, like refis and sales, which is not kosher).
So with it a certainty that no one with an operating brain cell would take over Countrywide’s servicing obligations unless they were paid to do so. And any such payment is contrary to the aim of the threatened action, which is to recover money for the investors.
So just because there is a litigation threat floating around a deserving target like Countrywide, don’t assume it will necessarily draw blood.
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In at least one of deals, Countrywide was the originator, depositor, and master servicer.
This is the first step in following the contract….ie. nastygram, wait 60 days for them to possibly cure, then another 60 day waiting period, then file suit. I think they are very serious about these putbacks, they just have to follow the contract
Headlines matter. The headline reads B of A is being sued by the NY Fed… The savior of this crippled giant is now saying the end of the road is here.
I fully agree. On something this sized with the gigantic publicity surrounding it you cannot just file suit on $47B of mortgages.
The fact that the Fed has now made public what it, Pimco, and Fannie and Freddie have been doing is a signal they aren’t playing ball any more.
Yves misreads this. The opening paragraph clearly states they are looking for repurchases. Unless she has seen the original letter. This is the issue that will force the banks to be nationalized.
Copy of the letter available via DealBook.
http://dealbook.blogs.nytimes.com/2010/10/19/new-york-fed-urges-bofa-to-buy-back-loans/
yeah, right.
they said the same about goldman. bp for that matter too.
they’ll just settle, and life will go on. this is no big deal.
Goldman’s become a cult according to insiders. Those tend to last for quite a while, then self-destruct very impressively. Unless it gets itself religion status and protects itself that way, the way the Scientologists did, I don’t see it lasting 10 years.
Countrywide originated plenty of deals during the boom and could be liable for breeches of reps and warrants.
YS – you do bring up good points and the monolines have unsuccessfully tried to sue countrywide for the same thing. So the question is: why are these large savvy asset managers suing then?
Part of the problem of proving that there was an origination defect is that all of the relevant documentation (if not “lost” already) sits with cw and they have no reason to cough it up. If the files got opened up to these well funded companies they could ferret out material inconsistencies fairly quickly.
They could be getting bad legal advice. I’ve seen this happen (oh, and these cases being expensive to pursue means the law firms do well when the clients are unlikely to win serious damages). The firm they are using is not one of the leaders in structured finance litigation (there are hardly any firms that are any good at this, this is a new area of litigation, and very few firms are willing to sue big banks).
The monolines have exactly the same legal claims. The bond insurers have brought similar actions to keep themselves from being put into receivership. The bond insurers have much better legal standing. Neutral parties (non involved attorney who know the terrains and litigation savvy hedge funds) are skeptical of these suits because even in a best case scenario, the recoveries won’t be high.
PIMCO and the NY Fed may understand the legal foundations (that the claims aren’t all that hot) but them having their names exposed (which they weren’t in the first round, the effort to pressure the trustee) is probably an effort to turn the heat up on Countrywide by exerting a toll on BofA stock.
Yves,
Nobody knows who a bond insurer is. Pimco is a household word, and the Fed is pretty well known too.
This is the Fed that bought these mortgages blindly so they could save the banks. Why bother going back and asking for money? The point wasn’t to make a buck, they wanted to save the banks. So why pressure them at all for a few bad loans.
Why would Pimco attach their name to this? To push down BoA stock so it can buy some?
Not only that – if it wasn’t a problem, why is this front page news everywhere? Freddie and Fannie buried their story in the Saturday NYT.
BoA will be nationalized within a few weeks – before Christmas.
Lehman’s re dux, further consolidation, weak culled, pull the bandaid off one hair at a time? IDK but it is suspicious, all of this has been…from day one…eh.
SEE: http://video.adultswim.com/harvey-birdman-attorney-at-law/la-dolce-vita.html
Skippy…it was GS Barney all along.
To suggest PIMCO and the NY Fed, et al., are doing what they’re doing may be the result of bad legal advice is a real stretch. They are getting advice about tactics, strategies, and risk/rewards, and like other sophisticated clients operating on this scale, they have more than ample resources to slice, dice and evaluate that advice in numerous ways, including independent second opinions, not to mention in house counsel. In short, the tactics we know about so far are being put in motion for strategic reasons by claimants whose internal, much less external legal sophistication could hardly be higher, not by accident of “bad legal advice.”
That is not to say the intention is to directly succeed via the tactics made public so far, but you can rest assured PIMCO, et al., have confidence in the risk/reward efficacy of strategies that go well beyond any tactics that are currently apparent.
It’s a chess game played on multi-dimensional boards, and these are just early moves, maybe even gambits, by some pretty savvy chess players.
“It’s a chess game played on multi-dimensional boards, and these are just early moves, maybe even gambits, by some pretty savvy chess players.”
I respectfully submit that you may be underestimating the uniqueness of this particular situation. This fraud is unparalleled in its nefarious scope and method, and I’m not sure there is a comparable episode quite on this scale to which one could reference. That coupled with the fact that there are so little rulings in this area of the law that its literally a legal wild west leads me to think that there is plenty of room for systemic erroneous legal advice and judgement.
This isn’t to suggest that the banks legal advisors and such aren’t grandmasters at chess, but rather that this is a completely different game with out a precedent with which to draw from and rules that have yet to be completely defined.
And from considerable personal experience, more often than not jabrones of this ilk tend to be far less capable than one would think. My SEC attorney is well respected in his circle on Wall, but I find him and most everyone I have had dealings with in that incestuous wolf-pack to be a f*cking idiots for the most part. More often than not the behind the scenes dealings are rife with far more personal agendas than professional cooperation.
But then again, I may be totally wrong, it’s tough to say.
So why are they doing it? With the NY Fed involved,is this a red herring? Does it mean that the other charges are more serious?
they may be doing it in order to get countrywide out of the servicer position so that they can become the servicers and get access to the loan files, since they have been denied access to such files. within the loan files lies the misstatements and stuff. this was a theory proposed on subprimeshakeout blog.
Is it really common for 3 quasi-governmental bodies to write a nastygram demanding $47b from an originator without believing they have a half-assed case?
The same three parties tried shaking down the trustee. It went nowhere. So they are batting 0 so far.
Right, this is just a demand letter, the worse outcome is that the servicer is dismissed and replaced by another or by the trustee. After that, the trustee could be booted out and replaced by another. The “investors” have no power to force buybacks of the mortgages, it is far too late for that (the time frame for the trust to do that is usually 6 months from closing) or to force liquidation of the trust, and they have to pay in advance the costs incurred by the trust if there is litigation. going nowhere fast…
Bank of America – Resumes Foreclosures
Moynihan De-Coded Message –
Damn the Torpedos Full Steam Ahead!
Let’s Keep Foreclosing And Make As Much Money As We Can The Feds Can’t Shut Us Down; We Are Invencible!
I wish they would fight amongst themselves, flat out litigation, anything to give the millions in steerage hope.
Reuters-
“If you think about people who come back and say, ‘I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cylinder,’ we’re not putting up with that,” Bank of America Chief Executive Brian Moynihan said on a call with analysts.
Yves,
Two questions:
1. Why is the cause of action a representation and warranty breach and is that only the only cause of action?
2. Is it established law that “Countrywide can demand repurchases only in the case of origination defects” and not for other reasons?
Thanks.
They haven’t sued yet, this is just a threat. But the underlying theory is a rep and warranty breach. They are stuck with this because the statute of limitations on securities law actions has passed. So they have to look to contract theories. They are trying to use the servicer (with whom the investors have a contractual relationship) as a way to extract blood from the originator (by putting loans back). Even if the servicer fell into line and tried, the originator would fight back. So there are two hurdles to surmount to reach their intended goal.
As indicated, there is hardly any established law here. The efforts to put back loans are recent, and to my knowledge (and I just checked with someone who is on top of it), no cases have been decided, nor will they be any time soon. This isn’t even a case yet, they are just taking the steps to be able to bring a case.
It isn’t even clear the parties have standing, for starters.
“They are stuck with this because the statute of limitations on securities law actions has passed.”
Funny that, all the lending/good fellas/due diligence shenanigans…so Bernie.
Skippy…clock is ticking though, extension makes one very thin and brittle in the end.
I’m aware they haven’t sued yet.
I was thinking more along the lines of a common law tort case (e.g. fraud). I don’t know about the statute of limitations on potential fraud cases because we don’t know when the loans and/or the fraud originated. But since — as you pointed out — nobody is going to take over the servicing, perhaps it’s not about finding a “new” servicer. Maybe it is about forcing BofA to become the servicer. Obviously Countrywide is not going to demand repurchases on loans it sold (unless forced to do so). The conflict of interest here is just plain silly. But if BofA is the servicer it might be required (by the trustee or a court) to force the repurchases back to Countrywide, even though it owns Countrywide. Do we know if Countrywide is in fact advancing principal and interest to the investors?
I agree.. the potential Tort of Fraud, as I remember it, is that the discovery of fraud sets the initial period. So to say, found out today.. then a two year period starts to start case. Under fraud(or the the threat of bringing suit) opens the door to State and Federal charges. This can make evidence available, and individuals complicit. Damages may only be the start. This may be only a threat, and NO ONE(wink wink) he he, wants a multiyear investigation where all the dirty laundry is exposed.
But what if… if any reprehensible actions (oh God, could there actually be any?) were exposed in a court of law, how long before one party flips on the next?
The idea that the “Fed” would take it, laying down, is the only recourse or what made the resolve to “risk” in this
debacle. Afterall, any chain of events involving any number of layers.. starts somewhere. Finger pointing does not help when the cat is outa the bag. Like Gekko said “..from one reality to the next..”. 10s, hell,, 100s of billions of dollars make one large reality of losses. Let the games finally begin:)
If it is such a long shot, to paraphrase MBS Guy, WHY are they doing this ?
The Bank of NY/Mellon is part of the action, as trustee.
Don’t they share some of this under fiduciary regs?
I still this is an action to be first in line at the bust-up counter.
Pimco wouldn’t act this way unless they already have the trade on, and are looking to get out.
So the big saviour, the omnipotent Fed, swoops in and declares that the BofA must pay them for the mess and that is satisfactory in the eyes of a voter?
People. These heaps of individual mortgage agreements are actually void, invalidated, nullified.
The FED, who under the guidance of Greenspan created this culture of no regulation for banks, get’s paid back by making a forcefull statement, as if, on behalf of the lawyers and everyday people who ultimately discovered the malfeasance.
So BOA makes a hefty enough payment and after couple quarters all is forgotten…
Where is the outrage?
You vote out one of the only two uneffectual parties colluding and entrenched with these practices and guess what your left with for the next 4 years? Bingo, the other one of the two parties of futility. It’s the inability of the voter to make a change. Every other legitimate democracy has more options than two major parties.
With the exception of Britain, France, and Australia, every other democracy has a system which is not subject to Duverger’s Law. (Look it up.) France is stuck with two major parties. Australia has a Senate not subject to Duverger’s Law, which helps, but is basically stuck with two major parties.
Britain has somehow managed to have a third major party (perhaps due to its exceedingly small districts), but it’s been hampered horribly.
Not sure about NC’s read on this.
This is procedural, right? The bondholders have to make written contact to the trustee, etc, etc. Otherwise it gets thrown out like the RBS v. CFC suit?
Basing this on info from the Subprime Shakeout blog:
RBS/CFC: http://subprimeshakeout.blogspot.com/2010/10/new-york-judge-tosses-greenwich-suit.html
PIMCO, et al: http://subprimeshakeout.blogspot.com/2010/10/pimco-blackrock-new-york-fed-demand.html
Also, with respect to Countrywide servicing vs. other servicers, you can look at any of the available reports on FC/REO liquidation timelines and see that Countrywide appears to be much much slower. Additionally, some of the bond investors now own or are invested in special servicers. If they can potentially move the servicing (and even set some sort of precedent), maybe the legal costs make sense. Just speculating here.
You missed the key point in the post. Servicing is a massive money losing business right now, particularly with respect to subprime portfolios. The servicer has to keep advancing principal and interest to the investors after the investor becomes delinquent. In theory, the only have to advance until the loan is “irrecoverable”. In practice, they keep advancing until they have advanced the entire principal amount of the loan. It’s long established industry practice (encouraged by rating agencies, who rate servicers separately) AND their computer systems are also set up for them to keep advancing principal and interest. They recover by foreclosures, and with loss severities at 60% to 70%, they often don’t get their dough back. And that’s before you factor in that a contested foreclosure (and more are being contested than was modeled in) can easily run $50,000 to $200,000 in legal fees.
No one will want to step in and eat the losses Countrywide is taking, no one. They’d need to be paid to take the servicing obligation.
You make it sound as if servicers eat the all the losses from soured MBS. If it was so, then why would MBS investors demand putbacks? They get paid “interest and principal” according to the mechanics you describe.
That’s a bit different than my understanding of a servicer’s business model. Maybe Countrywide is a different case when they are servicing mortgages they originated. Normally, as I understand it, the servicer eats the financing cost on P&I advances, but there is very little risk of not getting the actual P&I advances back.
Are you positive that servicers don’t get reimbursed by the trust in the case where the REO liquidation proceeds fall short of P&I advances?
The servicers are supposed to be repaid for P&I advances only out of foreclosures. Loss severities can be 200% or more if a foreclosure is disputed. There is a case I’m familiar with where the losses are going to be 400% before this is over.
There is reason to suspect they are using other principal payments, namely refis and sales, to repay their servicing advances. That isn’t kosher, but no one has gone after that yet.
Another metric: lots of banks were peddling their servicing arms to hedgies circa early 2008. They were all hemorrhaging cash then. No reason to think the picture has improved.
Seems like that actually is OK (i.e., pulling from the trust’s collections account if P&I advances are unrecoverable) based on some of the PSAs I looked at, but I’m no legal expert.
Hmm. If the principal *is* being fully returned, this explains why the investors aren’t pushing to have the entire transaction unwound, the one where they supposedly bought mortgage notes but didn’t actually receive them. Because all they’d get for that is the return of the principal.
But surely the servicers will eventually stop returning the full principal on the mortgages which they never legally transferred into the trusts?
Just saw this:
The sheriff for Cook County, Ill., which includes Chicago, is refusing to enforce foreclosure evictions for Bank of America, JPMorgan Chase and Co. and GMAC Mortgage/Ally Financial until they can prove those foreclosures were handled legally, CNBC is reporting.
Today’s announcement by Sheriff Thomas Dart comes after GMAC and Bank of America, the country’s largest mortgage servicer, announced rollbacks from foreclosure moratoriums, the news organization says.
Dart’s office released a statement indicating that Bank of America, GMAC and JPMorgan Chase account for approximately a third of the 3,700 eviction orders filed with the Cook County sheriff.
“I can’t possibly be expected to evict people from their homes when the banks themselves can’t say for sure everything was done properly,” Dart’s statement read.
“I need some kind of assurance that we aren’t evicting families based on fraudulent behavior by the banks,” the statement continued. “Until that happens, I can’t in good conscience keep carrying out evictions involving these banks.”
This is the second time in recent years that Dart has taken such a stand. Two years ago, he refused to enforce rental evictions in cases where tenants had not been informed their landlords had gone into foreclosure.
And this:
http://mddailyrecord.com/2010/10/19/maryland-court-of-appeals-adopts-new-foreclosure-rule/
ANNAPOLIS — Maryland’s highest court on Tuesday approved an emergency rule designed to identify and weed out irregularities in the mortgage foreclosure process.
The new rule, which takes effect immediately, allows circuit courts to appoint independent lawyers to review foreclosure documents for problems. If a problem with the lender’s paperwork is detected, it has 30 days to show — at its own expense — why the foreclosure should not be dismissed.
Is it possible that these three will “settle” and try to mute other litigation that would follow from other parties?
“Bank of America Corp., based in Charlotte, North Carolina, will see its stake in BlackRock drop to 34.2 percent from the 47 percent it held on March 31.” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aP8IpRzYSu2o
So BlackRock pressures itself to perform?
ZeroHedge has an article posted discussing the substantial cross ownership interests between BlackRock and Bank of America:
“It is well known that Bank of America owns 34% of BlackRock via a legacy position inherited from Merrill Lynch, arguably the most valuable part of the business. As of today, the stake is worth around $11.5 billion. Yet what may be a little less known is that BlackRock has also returned the favor, and is now the largest holder of Bank of America, owning 5.35% of the outstanding BAC shares, for a total value of $6.6 billion…”
Source: http://www.zerohedge.com/article/blackrock-bank-america-catch-22
Blackrock’s ownership in BoA is almost certainly on behalf of its asset management clients, not the Blackrock corporate entity (i.e., held off balance sheet in client accounts). This is not the case for BoA’s ownership of Blackrock (i.e., on balance sheet).
Tom Dart, the Cook County Sherrif, scion of the Dart branch of the Chicago Democratic Party, is running to replace Daley as mayor.
All economic news from Chicago Must be discounted with this factor in mind.
I think the million dollar question is “How much will B of A owe”? While it is possible that the put-back issue is overblown, bear in mind that even if B of A was forced to ONLY take back 20% of the bonds, they would still owe close to $10 billion… As ZH points out, their put-back reserves right now stand at about $4 billion, leaving them with a $6 billion hole to fill.
My point being that, even if BofA does manage a favorable settlement (10% – 30% put back rate) their potential liability would still far exceed their current reserves allocated for put backs. Interestingly this may be why BofA is fighting these claims so hard, because it could literally be all or nothing for them. If even a favorable settlement leads them to insolvency, why settle? They might as well take their chances in litigation and cross their fingers and hope for the best.
I’m going through the math in a later post. Trust me, it’s way lower than anyone understands, even in a best case scenario.
The investor group clearly hasn’t figured out the real problem.
If their trust is typical — i.e. the paperwork was never finished — they should be alleging that Countrywide never legally transferred the securities to the trust, that the trust is unfunded, and that Countrywide is therefore obligated to return the monies paid to them by the trust.
That’s not a “buyback”, that’s an “unwind” of an incomplete transaction
Agreed, they have an easier and bigger bucks theory they could have pursued.
“the paperwork was never finished” = efficiency = profit sans regulation – dumb dumb over under funded leverage…cough ether-too the power of my addiction + vacuum tube of enlargement – debasement of currency – need to blame others cough….China…meakly euro…
Skippy…the kids burnt down the X-Mas tree…
You forgot.”Ya got any coke man?”
BAC is not liable for the debts of its subsidiary,Countrywide. If things get bad Bac can walk away.
The key to this is that trustees sell servicing rights and the special servicers are usually also the b-piece investor (Holder of First Loss). The Advances are the key to the whole scam – Advance $1 for foreclosure services, take that $1 back as costs and then charge the Trust another $1 plus interest for repayment of Advances – what a sweet scam! That is why criminal bankers like Wells Fargo can book tens of billions of MSR’s on their balance sheet and then take millions as bonuses!
This game will eventually come to an end with an international application (claim) in ICJ and WTO with U.S. government as the key defendant along with all Wall Street and national banking institutions and their execs and officers as international criminals. The whole world has suffered significant losses because of these MBS frauds.