There have been so many bailouts settlements of various bank mortgage misdeeds that it’s no doubt hard to keep them straight unless you are on this beat. But the short version is I’m delighted at this effort to throw a monkey wrench in the Bank of America settlement. It is a particularly nasty bit of self-dealing among interested parties (Bank of America, the supposed trustee for investors, Bank of New York Mellon, which had plenty of its own liability to bury), a profiteering attorney (Kathy Patrick of Gibbs & Bruns), and “investors” like the New York Fed and fund managers like Blackrock who have reason to be less than return maximizing. There is no doubt that this settlement is a screaming bargain relative to the liability that Bank of America faces on the $242 billion in principal amount of Countrywide bonds in question.
We had discussed the self dealing at some length in an earlier post; this is the overview:
A petition filed by some unhappy investors on Tuesday raises some serious challenges to the so-called Bank of America mortgage settlement. The embattled bank hopes to shed liability for alleged misrepresentations made by Countrywide on loans sold in 530 mortgage trusts with $424 billion in par value. We said it was a bad deal for investors because, among other things, it included a very broad waiver of a very valuable right, that of being able to sue over so-called chain of title issues (in very crude terms, whether the parties to the deal did all the things they promised to do to convey the loans properly to the mortgage trust).
This action raises three sets of different issues: the conflicts of interest among the parties trying to push this deal through, the process used to finalize the deal, which this pleading contends were devised to give the other investors short shrift; and the inadequate amount of the settlement, not only for parties that have tried to move their own putback litigation forward, but arguably for all parties.
In a different action, some unhappy investors (there are MANY parties unhappy about this deal, including AIG, the FDIC, the attorneys general of New York and Delaware) tried removing the case from state court to Federal court, where it would have been heard by William Pauley. Pauley’s early rulings made it very clear he was disturbed by the conflicts and was going to be sympathetic to the aggrieved intervenors. However, the case went back to New York state court, before the generally clueless and bank-friendly Barbara Kapnick.
The foregoing is an a very high level overview of over what is approaching two years of legal jousting. Now to the Federal Home Loan banks part of the equation.
In July of 2011, six Federal Home Loan banks filed a motion demanding more information about the loans in the mortgages from the trustee, Bank of New York Mellon. Their bone of contention was that they questioned the key assumptions in the analysis that argued that the $8.5 billion amount was fair. They said that changing one key assumption would increase the fair value to $22 to $27.5 billion, and changing any of three further important assumptions would increase it even more.
Today’s piece from Gretchen Morgenson of the New York Times, which reports on a new court filing by the Home Loan banks of Boston, Chicago and Indianapolis last Friday, brings us up to date. The charges are serious.
First, the suit accuses of Bank of America (and mind you, this is Bank of America, this conduct took place AFTER the Countrywide acquisition) of failing to buy mortgages back on when it modified them, as stipulated in investor agreements. Per Morgenson:
Among the new details in the filing are those showing that Bank of America failed to buy back troubled mortgages in full once it had lowered the payments and principal on the loans — an apparent violation of its agreements with investors who bought the securities that held the mortgages.
An analysis of real estate records across the country, the filing said, showed that Bank of America had modified more than 134,000 loans in such securities with a total principal balance of $32 billion.
Now people who understand the economics of mortgage securitization are no doubt scratching their heads. Why was Bank of America modifying securitized mortgages? As we’ve written on this blog repeatedly, servicers get to charge all sorts of fees when they foreclose, while they go through a lot of hassle to do mods and don’t get to collect any extra money from investors for all that work. Banks have started doing a bit more in the way of mods only in response to increasingly generous bribes from the Treasury department plus some credits in the state/Federal settlement of early last year.
So what was up at Bank of America? The second charge is the bank was self-dealing:
Even as the bank’s loan modifications imposed heavy losses on investors in these securities, the documents show, Bank of America did not reduce the principal on second mortgages it owned on the same properties. The owner of a home equity line of credit is typically required to take a loss before the holder of a first mortgage.
By slashing the amount the borrower owes on the first mortgage, Bank of America increases the potential for full repayment of its home equity line. Bank of America carried $116 billion in home equity loans on its books at the end of the third quarter of 2012.
And no, this was not the upending of the creditor hierarchy that was sanctioned by last year’s settlement (second mortgages should be wiped out before a first mortgage is touched, but last year’s settlement had a complex formula that allowed for what was close to a pari passu reduction of first mortgages with a mod of a second. This lead to investor outrage, but since all investors have done is be outraged, rather than go to court, the Administration knew it could bulldoze them). The filing has examples of mods that took place well before the settlement, and they were reductions of investors owned first mortgages to increase the value of bank-owned second liens:
One example shows investors suffering a loss of more than $300,000 on a $575,000 loan made in 2006. In May 2010, Bank of America reduced the principal owed on a first mortgage to $282,000, but at the same time, real estate records showed, Bank of America’s $110,000 home equity line of credit on the property remained intact and unmodified.
Another example indicates that Bank of America kept its $170,000 home equity line intact on a property while modifying the first mortgage held by investors. In that case, the investors took a $395,000 loss…
“We’re confident that our approach will be successful for investors and that the facts speak for themselves,” said Thomas Priore, founder of ICP Capital, who is overseeing the Triaxx analysis. “These are just a few examples of the negligence we found.”
The big problem here for the Federal Home Loan banks is likely to be procedural rather than substantive. Bank of American and Bank of New York Mellon chose to use a New York state Article 77 hearing to get the pact approved precisely because an Article 77 hearing is a rarely used procedure for a court to rubber stamp actions taken by trustees. The hearing presupposes that the trust beneficiaries have similar interests and that the trustee is acting in good faith. Judge Pauley’s blistering rulings firmly rejected that notion, but Kapnick is going ahead with the Article 77 process, which means I’m not at all clear how this damning filing will be received. Stay tuned.
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Pass the popcorn.
all I have to say is — keep up the good work
I’m a little lost on the connection between the Independent Foreclosure Review and the National Mortgage Settlement? Both seem to suggest the need to cut me a check, Yet they are not affiliated? Is there any need to investigate the legitimacy of the payoff here as well? I hope for the payoff so that I can donate more to the cause. THANK YOU SO MUCH FOR ALL THE HARD WORK !
Yes, this is why it is hard to keep track.
To rewind, 50 state AGs started an investigation/negotiations in late 2010 (recall the robosigning scandal broke that September). All the relevant Federal regulators joined (banking regulators, DoJ, HUD, well now that I think of it, FHFA was NOT part but everyone besides the FHFA). Can’t have states embarrassing the Feds, now can we?
Elizabeth Warren got the CFPB included and started providing analyses of what reasonable damages might be. That of course got leaked to discredit her and the negotiations generally. Around that time, (April 2011) the OCC broke from these negotiations and imposed its OWN consent orders, all by its little self. The IFR was part of the OCC consent order.
The big negotiation lumbered on and produced its own settlement in early 2012.
Besides layoffs … has anybody been fired for this crap? Is everybody involved still gainfully employed by these bloodsuckers?
Looking at how originators hosed investors and the forbearance provided by various regulators and prosecutors, is the MBS business dead? It sure as hell should be. I mean, it is one thing to throw away a few dollars at the carni, but we are talking hundreds of billions, perhaps trillions of flat out, stolen money with damned little repercussion. Or, are there still rubes out there that think they can beat the house?
Think about friends. If BAC offered up a gold-plated, sure to win CDO with a 7% coupon, would you be the least bit interested? If you said, “yeah”, or “maybe”, please re-read Econned. Unless your name is Paulson, Bass, or Litowitz, you are the rube at a table of card sharks. The game is rigged.
For profit commercial banks are a menace and should be eradicated.
I understand the Fed is still in the market to buy. At 100 cents on the dollar.
I wonder why investors are still buying the crap as well. Even if they get 100 cents on the dollar they still lose because of opportunity cost. And even if they get 100 cents on the dollar on the securities that make it through the convoluted system only the corrupt banksters and hamstrung or revolving door government agents understand many of those securities won’t see the light of day. Even Bloomberg Terminal doesn’t have historical loan level detail and I’m hearing they don’t want to give it to auditors as it conflicts with their largest customers, the banks, my opinion. And not a sole is discussing that these notes were multiple and triple pledged. According to an article in the NY Times Taylor Bean & Whitaker wasn’t the only company doing this; it was an industrywide practice. The result is every pension fund in the country is at risk.
From the Times article, “According to people briefed by those winding down Taylor Bean’s operations, who requested anonymity in order to preserve professional relationships, there are signs that the company sold some of its loans to more than one buyer.”
…“People familiar with the mortgage machine’s innards say problems were industrywide.”
http://www.nytimes.com/2009/12/13/business/13gret.html?_r=0
Real investors *aren’t* buying this toxic waste any more.
The problem is an agent-principal problem. Certain “trustees” or agents buy the toxic waste “on behalf of” investors. These agents have a conflict of interest and are violating their fiduciary duty, but hey, they get “access” and other perks given to them by the banks who are selling the toxic waste, so they’re happy to betray their trust.
–>requested anonymity in order to preserve professional relationships<–
Admitting outright that the banks use "access" as their blackmail tool to get trustees to violate their duties to the beneficiaries.
Just finished reading Allsion Frankel’s piece on ResCap and Ally where she notes the similarities in investors claims and objections.
I feel sorry for the investors.
Fear not, investors. Now’s your chance to invest in the single-home rental bonanza, backed by pension funds:
http://www.bloomberg.com/news/2013-02-04/jpmorgan-joins-rental-rush-for-wealthy-clients-mortgages.html
At least 75% of the foreclosed properties were confiscated upon forged documents. In recent years, it was a possibility that these properties could be returned to the original owner/occupants upon judicial determinations that the foreclosures upon forged documents are void. By bundling the properties which have been criminally confiscated, selling them to a new buyer and putting new occupants into the stolen homes, this scheme now pits the wrongfully evicted owner/occupant against the new resident. This scheme will facilitating the preservation of the new status quo (titles founded on foreclosures using forged documents, a/k/a title-laundering.) The process of judicial and nonjudicial foreclosure on forged documents can now be followed by what has heretofore be missing: the bona fide purchaser for value who relied upon the validity of the forgery-produced change of ownership registered in the public records. This makes the lawful return of the property to the victim of the crime less likely because now there will be an apparent holder in due course. Of course, the seller (JPMorgan Chase) did not have lawful title to sell (knowing that the foreclosure was based on forgery) but the buyer of the bundles could argue it is a bona fide purchaser for value without notice of the prior claim and block the recovery of the real estate by the crime victim by further confusing the application of the law to the facts. I believe this was planned all along and the endgame is the successful coverup of the greatest land grab since Manifest Destiny.
“bona fide purchaser for value” exceptions work in the law of *personal* property, but from what I’ve read they does NOT work in the law of *real* property, where “Nemo dat quod non habet” rules. (This may vary by state.)
If you were a bona fide purchaser for value of land from someone who didn’t own the land, you got nothing, sorry, out of luck. Mass. Supreme Court has confirmed this in recent cases.
The exception to the “Nemo dat” rule in *land* is in the *recording statutes*. This means that the new purchaser *has to record the purchase at the local county clerk’s office* before the true owner asserts his or her rights.
If the original person who was illegally foreclosed upon registered their title back when they made the down payment, this is going to be impossible. :-)
If Kapnick rules against the FHLB, can’t they appeal? I may not be a lawyer but know a bit about trusts, and from a common sense standpoint, it turns the whole trust concept on its ear if the trustee has no obligation to protect the interest of the beneficiaries. The way I read it, it leaves the investors essentially with a load of assets with zero protection against loss from either negligence or wrongdoings committed by those with control of their assets.
We need a Fred Friendly Seminar. We can invite Arthur Schack, Barbara Kapnick, William Pauley, Mariana Pfaelzer, Jed Rakoff…
I offer the use of my backyard, but will need volunteers to bring folding chairs.
Also if anyone has one of those big coffee makers…
See, Im still trying to find out. All this paperwork that was taken out of the county clerks perview, and registry, you know deeds and registers for tax purposes. Do the counties know of the “fraud” “devaluation””and “complicity” they were involved in. Do they still have their paper?
Just re-watched the news of last night, here in KC some one finally figured how to scam the system, fake paperwork. So the counties, must not have a good record of whats going on? So anyoone can do this and get away with it? It’s not against the law in missouri to fake a quit claim, for tax purposes?
My god, how far did they ruin America. There is no legal claim now except for the borders, and no one wants to protect our borders. So I guess the last man out should leave the lights on so the world dont fall over the edge of the earth.
This was filed in 2011, and your bringing this up again for what reason? Oh I see…you hate banks…what a tool!!