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. Since this settlement has a lot of constituent elements and I want to cross check my reading with lawyers on this beat (I’ve been in contact with some, but they have not digested the documents fully either), I’ll simply flag a few high level issues.
The deal is not done. The settlement is actually between the trustee, Bank of New York, and Bank of America. The deal is subject to a so-called Article 77 proceeding. Objections are to be filed by October 31 and the hearing to approve the settlement is set for November 17.
The deal should be presumed to be favorable to Bank of America. Let’s just look at this from a game theory perspective. We’ve hectored Tom Miller for doing a bad job of representing his fellow state attorneys general in their mortgage negotiations for doing no investigation and therefore having no smoking gun and not much leverage. We have a different fact set and process but similar issues here. 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?
The other side has no ability to judge what it might get since it has not gotten access to the loan files (the Clayton reports that everyone makes noise about which found pretty significant violations of representations, did not look at which were significant from a risk of loss perspective. So they may make for great headline, but they aren’t very helpful in this context.
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.
The investors are giving Bank of America a broader release than just of the rep and warranty claims. This looks like a “get out of liability free” care on chain of title issues. The critical bit is the release, which is section 9 (boldface ours):
Effective as of the Approval Date, except as set forth in Paragraph 10, the Trustee on behalf of itself and all Investors, the Covered Trusts, and/or any Persons claiming by, through, or on behalf of any of the Trustee, the Investors, or the Covered Trusts or under the Governing Agreements (collectively, the Trustee, Investors, Covered Trusts, and such Persons being defined together as the “Precluded Persons”), irrevocably and unconditionally grants a full, final, and complete release, waiver, and discharge of all alleged or actual claims, counterclaims, defenses, rights of setoff, rights of rescission, liens, disputes, liabilities, Losses, debts, costs, expenses, obligations, demands, claims for accountings or audits, alleged Events of Default, damages, rights, and causes of action of any kind or nature whatsoever, whether asserted or unasserted, known or unknown, suspected or unsuspected, fixed or contingent, in contract, tort, or otherwise, secured or unsecured, accrued or unaccrued, whether direct, derivative, or brought in any other capacity that the Precluded Persons may now or may hereafter have against any or all of the Bank of America Parties and/or Countrywide Parties arising out of or relating to (i) the origination, sale, or delivery of Mortgage Loans to the Covered Trusts, including the representations and warranties in connection with the origination, sale, or delivery of Mortgage Loans to the Covered Trusts or any alleged obligation of any Bank of America Party and/or Countrywide Party to repurchase or otherwise compensate the Covered Trusts for any MortgageLoan on the basis of any representations or warranties or otherwise or failure to cure any alleged breaches of representations and warranties, including all claims arising in any way from or under Section 2.03 (“Representations, Warranties and Covenants of the Sellers and Master Servicer”)1 of the Governing Agreements, (ii) the documentation of the Mortgage Loans held by the Covered Trusts (including the documents and instruments covered in Sections 2.01 (“Conveyance of Mortgage Loans”) and 2.02 (“Acceptance by the Trustee of the Mortgage Loans”) of the Governing Agreements and the Mortgage Files) including with respect to alleged defective, incomplete, or non-existent documentation, as well as issues arising out of or relating to recordation, title, assignment, or any other matter relating to legal enforceability of a Mortgage or Mortgage Note, and (iii) the servicing of the Mortgage Loans held by the Covered Trusts (including any claim relating to the timing of collection efforts or foreclosure efforts, loss mitigation, transfers to subservicers, Advances, Servicing Advances, or that servicing includes an obligation to take any action or provide any notice towards, or with respect to, the possible repurchase of Mortgage Loans by the Master Servicer, Seller, or any other Person), in all cases prior to or after the Approval Date (collectively, all such claims being defined as the “Trust Released Claims”).
Each of the three bolded sections is horrific.
Um, remember how we’ve been saying, and it appeared to have been confirmed by testimony in Kemp v. Countrywide, that all the notes were sitting with Countrywide when they were supposed to be with the trustee, and they were therefore almost certainly not endorsed as required by the pooling and servicing agreement? This looks like a way to shunt liability for this little problem.
The second bolded section gets Countrywide as originator out of any liability for chain of title issues.
The third bolded section would seem to allow Countrywide as servicer to shed liability for servicing abuses of all sort (there is qualifying language in section 10, but it does not seem to address the concerns I discuss here, but I welcome input and correction if warranted). All those impermissible fees to borrowers, such as junk fees, pyramiding fees, and overcharges, ultimately come out of the investors’ hides, since the borrowers go tits up and they payments ultimately are deducted from the proceeds of the sale of the house. And there are more obvious abuses of investors, like double dipping (charing fees to both investors and borrowers when only one should be charged) and servicers taking fees out of refi cash streams when they should only come from foreclosure proceeds.
As indicated, there is a good bit more here, but I wanted to stick to the biggest issue, which is the money versus the terms of the release. And the release looks to be far too broad and therefore a terrible deal to investors. This suggests the attorney may be savvy at getting deals hammered out and winning her fees but not at representing the real interests of her clients.
Update: This deal does not waive securities law claims but I don’t regard those as a major issue for Bank of America (the trustee is another matter), since the statute of limitations has passed as far as the origination of these deals is concerned. There is still liability on the ongoing representations made in annual filings on these RMBS (transactions with fewer than 50 investors can stop making those filings but virtually every deal made at least one annual filing).
There is also a longish discussion in paragraph 6 of how Bank of America is to prepare exception reports, and the bank is required to pay out 100% of any losses in cases where losses resulting from these errors is not covered by title insurance. Masaccio provides a good summary:
If a document is still on the revised exceptions list, with both a documentation error and a title insurance error, when an RMBS tries to foreclose, and if the RMBS is unable to foreclose because of documentation errors, and if no insurance is available, then BAC has to pay the entire loss.
The reason I don’t regard this language as all that helpful to investors is that despite its length, it actually fails to address the overwhelming majority of standing challenges:
The Initial Exceptions Report Schedule shall be prepared in good faith, after reasonable diligence, and shall include each Mortgage Loan in the Covered Trusts (including, for the avoidance of doubt, Mortgage Loans for which the servicing rights are sold following the Signing Date) that, on the Trustee’s Loan-Level Exception Reports (as defined below), is subject to both(A) a document exception relating to mortgages coded “photocopy” (CO), “copy with recording information” (CR), “document missing” (DM), “county recorded copy with comments” (IN), “certified copy not recorded” (NR), “original with comments” (OO), “unrecorded original” (OX), “pool review pending” (PR), “contract” (CONT), and “certified copy-issuer” (CI) on the Trustee’s Loan-Level Exception Reports, (“Mortgage Exceptions”) and (B) a document exception relating to title policies or their legal equivalent coded “document missing” (DM), “title commitment” (CM), or “preliminary title report” (PL) on the Trustee’s Loan-Level Exception Reports, (“Title Policy Exceptions”), provided that it shall exclude any such Mortgage Loan registered on the Mortgage Electronic Registration Systems (“MERS”). Mortgage Loans paid in full or liquidated as of the Signing Date shall not be included in the Initial Exceptions Report Schedule.
This thus precludes MERS and local recording issues (note our post earlier today with adverse decisions in Oregon), failures to have complete chain of title, efforts to transfer the note into the trust after the cutoff date in the PSA, etc. There is no requirement to see whether the notes and assignments comply with the requirements of the PSAs.
As masaccio notes: “The settlement is based on the theory that documentation errors can be cured at this late date.” A significant and growing number of judges have rejected that theory. Yet the broad release dumps the risk of judges taking the errors and misrepresentations made by the originators and servicers seriously and rejecting foreclosure actions on the investors when it should properly sit with the parties that created this mess.