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Bank of America Discussing Settlement of Pimco/Fed/Blackrock Letter (Updated: Less Here than Meets the WSJ’s Eye)

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The Wall Street Journal reports that Bank of America is in discussions with a group of investors headed by Pimco, Blackrock, and the New York Fed that sent a letter roughly 60 days ago that was setting the groundwork for possible litigation. The underlying issue is alleged breaches of representations and warranties in 115 Countrywide securitizations.

Note that this development is not unexpected, although the timing is interesting. These cases nearly always wind up being settled; the cost of pursuing them very far is extremely costly to both sides. Note the problematic issue is not the breaches of the reps and warranties, which most commentators focus on; it’s that it takes a great deal of forensic work to prove those rep and warranty failures were really what caused a particular loan to go bad. As a result, these cases tend to be fought on a loan by loan basis; even a process that constructed adequate samples for each of 115 trusts would involve a whole passel of loans.

The part that appears to be a climbdown is that Bank of America had previously issued a “we will fight them on the beaches, we will fight them in the trenches” sort of statement. So they seem to be entering into talks earlier than one might have expected. But there could be other reasons for this development. First is that the investors had some procedural hurdles to surmount; it seems odd that Bank of America id did not see whether they failed to overcome those obstacles. Second is judges take an extremely dim view of parties showing up in court not having tried to work things out. So Bank of America may be talking simply to make sure it does not prejudice its position (as in it expects the talks as unlikely to lead to settlement yet, but is willing to see, but anticipates the two sides are too far apart and the talks break down, go a few rounds in court, and then wind up back in settlement negotiations, which each side having a better sense of gives and gets). Third is that the CEO and board are under pressure to settle, since even if they believe the settlement amount would be smaller if they go a few rounds and force the investor group to see how costly it will be to prove out its case, that the damage to the stock price in the interim is unacceptable to some influential shareholders.

From the Wall Street Journal:

Bank of America Corp., after vowing to fight requests that it repurchase certain loans, has begun potential settlement discussions with some of its largest mortgage investors, according to people familiar with the situation…

The approach appears to be a major shift in strategy for Chief Executive Officer Brian Moynihan, who in November pledged to engage in “day-to-day, hand-to-hand combat” on investor requests to repurchase flawed mortgages made before the U.S. housing collapse.

The investors, some of whom are acting on behalf of clients, sent a letter in October alleging that a Bank of America unit didn’t properly service 115 bond deals comprised of residential mortgages. It gave the bank 60 days to respond. The disclosure of the letter sent Bank of America’s stock tumbling 4.4% on Oct. 19, as investors grappled with concerns that the bank could be overwhelmed with such investor requests.

With the 60-day investor group deadline set to expire Thursday, the two sides agreed to begin “constructive dialogue” about the group’s concerns and what it wants, one person familiar with the matter said. The talks could still fall apart but the conversations are an attempt by the bank to put the matter behind it, said people familiar with the situation.

This WSJ story was released after the market closed. If the stock pops tomorrow, it would support the thesis that stock price concerns were at least in part behind this move. Put it another way: Bank of America may see itself as vulnerable on a number of fronts, and may be willing to trade off minimizing unfavorable press against what would be the likely value-maximizing litigation strategy.

Update: This report from an industry insider:

This “story” is a crock. I’m no fan of Bank of America in general and particular, but the parties pressing this litigation have managed to get the press to run what amount to their press releases. I suspect they are the source for this “news” which is effectively that the 60 day period has expired and this “story” is cover for giving BofA an extension.

Update 2, 10:00 PM. A report from Bloomberg is consistent with our source’s take above. The Bloomberg story, released two hours after the WSJ account, indicates that this “news” is in fact an extension of the 60 day litigation deadline by the investor group. This is not a terribly sensational development, as the WSJ account would lead you to believe. It is normal for parties pre-litigation to explore settlement possibilities; in fact, it would be highly irregular for them not to. In addition, we said from the outset that cases like this are always settled; they are too costly to go to trial (although as with the MBIA litigation, a claim might be filed and both sides might pursue some discovery before engaging in more serious settlement talks).

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11 comments

  1. Yves Smith Post author

    Due to problems with my RSS reader, I need to delete and repost for an updated version of a post to appear in RSS readers. I am hoping this will be resolved soon. In the meantime, I had to brute force an update by deleting the updated version of this post (no change in original post or two updates added). That in turn meant the comments were lost. I am restoring them manually.

    1. Yves Smith Post author

      Shoot, I screwed up, and sincere apologies to those who left comments earlier. I mistakenly closed the page that had the comments in them. I also went to the WordPress staging area to try to recover them, but they are gone there too.

      I’ve been on my tech guy to straighten out my RSS for over a month, both yours truly and other bloggers will make minor typo corrections and other fixes right after a post has gone live (Barry Ritholtz views posts as having “jelled” after the first half hour). So my typo prone posts are even more typo filled in RSS, since as it stands now, the very first post is the final, while every one else’s posts refresh, albeit with a delay.

      Again, apologies, I will make sure not to make this sort of mistake again.

  2. jal

    I’ll repost since I think, contrary to you that there is something to look at concerning … ” servicers may be required to purchase any loans they renegotiate at the face value outstanding or at a premium.”

    Why would there be so much trouble to get a loan mod.?
    Look at who ends up loosing a lot of money.

    mike says:

    Yeves,you might want to look at this lawsuit that JAL has posted in the comments.Here’s a VERY good reason that BAC may want to settle with Pimco,et al.

    [b]Think of the implications of this lawsuit. I could see loan mods come to a halt. Class Actions involving MBS investors as plaintiffs flying around ..[/b]

    Section 2.03(a) No provision of any of the PSAs permits Countrywide Servicing or Countrywide Home Loans to modify any loan without triggering the requirement that either Countywide Home Loans or Countrywide Servicing purchase the loan.

    Looks like you were doing some reading! :-)

    Now look at the following
    http://www.ritholtz.com/blog/2010/10/full-text-of-letter-to-bofa-from-ny-fed-maiden-lane-freddie-mac-pimco-western-asset-mgmt-neuberger-berman-kore-advisors/
    Full Text of Letter to BofA from NY Fed (Maiden Lane), Freddie Mac, Pimco, Western Asset Mgmt, Neuberger Berman, Kore Advisors

    1. Section 2.03(c) of the PSAs states that “Upon discovery by any of the parties hereto of a breach of a representation or warranty with respect to a Mortgage Loan made
    pursuant to Section 2.03(a) … that materially and adversely affects the interests of the Certificate holders in that Mortgage Loan, the party discovering such breach shall give prompt notice thereof to the other parties.” The Master Servicer has failed to give notice to the other parties in the following respects:
    a. Although it regularly modifies loans, and in the process of doing so has discovered that specific loans violated the required representations and warranties at the time the Seller sold them to the Trusts, the Master Servicer has not notified the other parties of this breach;
    b. Although it has been specifically notified by MBIA, Ambac, FGIC, Assured Guaranty, and other mortgage and mono-line insurers of specific loans that violated the required representations and warranties, the Master Servicer has not notified any other parties of these breaches of representations and warranties;
    c. Although aware of loans that specifically violate the required Seller representations and warranties,[b] the Master Servicer has failed to enforce the Sellers’ repurchase obligations,[/b] as is required by Section 2.03; and,
    Although there are tens of thousands of loans in the RMBS pools that secure the Certificates, the Trustee has advised the Holders that the Master Servicer has never notified it of the discovery of even one mortgage that violated applicable representations and warranties at the time it was purchased by the Trusts.
    ===
    http://www.scribd.com/doc/33940688/3/III-SECURITIZATION’S-RIGIDITIES
    Additionally, servicers may be required to purchase any loans they renegotiate at the face value outstanding or at a premium.

  3. marnie

    Hard to believe. I’m a professional investor, but far from expert on this topic. Still, even to my uninformed eye, this is nothing more than a procedural move. WSJ’s assertion that this is a “major shift in strategy” is particularly uninformed. BAC is merely taking this move to keep all of its options open.

  4. razzz

    This is not only a BofA issue. Sure they will settle before having to produce any pertinent documentation. So will any other bank/investment house settle in time before a court date of even discovery.

    Lose one case, lose them all industry wide.

    Looking for another bailout to prevent the banks from collapsing again due to payouts on corrupt paperwork.

    Death by a thousand paper cuts.

    1. Yves Smith Post author

      You are missing the key element in this game. These cases never ever go to trial. The cost of analyzing the mortgages on an individual basis (finding out why the borrower defaulted, or more accurately, finding out enough about the borrower and his finances to make as argument as to why he defaulted) is prohibitive for both sides. So you assumption that the pressure results from exposure of dirt in a trial is not operative.

      1. razzz

        All that’s been shown so far is how some underlings prepared and disguised documents directed by attorneys not limited to backdating and false notary.

        Whether a mortgage holder could meet his obligations or not is a minor detail in the overall big picture and considered passe by banks…..it is not passe, it is foundational. The scheme starts by selling as many houses (mortgages) as possible to eventually be packaged as over-leveraged securities sold OTC accompanied by CDO and CDS (bets). Before RE crashes individuals begin defaulting in masses, the first signs of cracks in this over-leveraged scheme.

        I would consider this fraud and fraud can not stand the light of day. Approving questionable loan applicants is at the bedrock of the scheme.

  5. Fractal

    The comments engine was kludgy last night and may have a shorter than usual character limit. These are some of the new facts reported in the Bloomberg piece:

    The group pressing banks over bad mortgages has grown to 17 firms from the eight that signed the Oct. 18 letter, said Kathy Patrick, a lawyer for the investors. Investment managers, pension funds and insurers are among the group, said Patrick, who declined to name the firms.

    *********[snip] [BAC quote]**********

    Any settlement would disadvantage bondholders not part of it, meaning that investors not participating in Patrick’s group are finally realizing that they also need to act jointly, said Bill Frey, head of Greenwich, Connecticut-based securities firm Greenwich Financial Services LLC.

    *****

    “This says to investors, this is a free-for-all,” said Frey, who is providing advice to a group of investors with more than $800 billion of mortgage bonds coordinating through a Dallas law firm.

    MetLife Inc., the biggest U.S. life insurer, is part of the investor group with BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, people familiar with the matter said in October. They are represented by Gibbs & Bruns LLP.

    Jack Gutt, spokesman for the New York Fed, declined to comment, as did Bobbie Collins of BlackRock and Mark Porterfield, a spokesman for Pimco.

    “Our clients are pleased that all the interested parties are talking,” Patrick said in an interview. The investors may still sue the banks if talks fall apart, she said.

    The accord was reached among the bank’s home-servicing unit, Gibbs & Bruns, and Bank of New York Mellon Corp., the debt’s trustee, according to Bank of America’s statement.

    ********

    “The claims and defenses of all parties are preserved,” the company wrote in the statement.

    The October letter and related deadline are tied to the bank’s practices in managing, or servicing, mortgages. After notifying Bank of America of alleged servicing flaws, investors can after 60 days demand that BNY Mellon declare the bank in default of its servicing contract.

    If that default isn’t cured within an additional 60 days, investors can take action against Bank of America, BNY Mellon, or both, Patrick said in October. Typically, only trustees for mortgage bonds can demand sellers buy back loans whose quality failed to match contractual promises, and sue if they don’t.

  6. cj

    A month ago this website said the about this issue that investor claims were “overhyped” and “unsubstantiated” and that BofA counsel had a “foreceful retort”.
    Well maybe not. That is not an insightful analysis and perhaps it would help to at least stop smoking the Countrywide hooka pipe.
    For example, why not try to substantiate rather than just assert the claim made on this website that GSE loan putback rights differ from private investor rights in respect of reps and warranties. Where in the PSA is that? I think you may find the truth is somewhat different.

    1. ScottS

      Yves has said that the Reps & Warranties gambit is more trouble than it’s worth, since you have to prove that the loan was materially fraudulent from the beginning, and not the result of job loss, illness, etc. That is difficult.

      Yves has said that a better avenue for attack from the investor’s perspective is to say that the notes were never legally transferred, and demand money back for notes that were never received.

      Why the difference between private label and GSE Reps & Warranties matters, I don’t understand. It’s a separate issue.

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