Bank of America (BAC) has rejected a request to buy back $47 billion dollars in soured mortgage loans originated by Countrywide, who they bought in 2008.
In an article on FDL.com, David Dayen reported that Bank of America’s rejection will likely trigger legal action by the consortium of investors who called for the repurchases, including institutional giants Pimco and BlackRock, and the Federal Reserve Bank of New York.
In a letter, Bank of America denied that the loans were made or handled improperly. The letter, first revealed by The New York Times, goes on to say that Bank of America attorneys also dismissed the suggestion that its handling of loan modifications and other efforts to prevent foreclosure violated the terms of the mortgage-backed securities the investors hold.
The practice of modifying loans found to have faulty paperwork or those written outside of normal underwriting standards, according to a notice filed last month by investor attorney Kathy D. Patrick, breached agreements that the bank had signed on to.
To say this is unwelcome news for the banking giant is an understatement. Their stock, before last week’s rally, had dropped 41% since April 15. But what may draw more attention from investors, however, is what this move says about the relative strength of Bank of America, particularly in light of comments made by AFL-CIO attorney Damon Silvers.
In Bloomberg News, Jonathan Weil reported that, at a hearing of the Troubled Asset Relief Program’s (TARP) oversight panel, Silvers openly worried about the risk that Bank of America might need another bailout.
The banks basically have three adversaries right now. First, they have judges giving more scrutiny to the foreclosure documents they submit to court, and whether the banks have the standing to foreclose on the properties. Second, they have the state Attorneys General investigating them over foreclosure fraud, errors in origination and securitization, and generally their whole process over the past several years. And third, we have the investors, who see an opportunity to put back mortgages on the banks where there are improper underwriting standards, improper conveyance of the mortgage note, or any other error.
These three forces often work at cross purposes. Bank of America claimed in its letter that the investors want them to foreclose on these homes quicker. That’s more tranche warfare than anything, because certain investors prefer foreclosures over others. But in a general sense, investors have been amenable to loan modifications. Typically the bank will claim their hands are tied on a modification because they don’t have sign-off from all the investors, but that’s a pose, and an excuse not to do right by the customer.
Ultimately, this will be resolved in court. And the investors can argue that they were lied to when they purchased the security. It remains to be seen if other investors jump on board with other loan pools.
