It’s pretty remarkable that Mr. Market shrugged off the devastating implications of the amended lawsuit filed by the Nevada attorney general, Catherine Masto against various Bank of America entities. As we’ve stated before, litigation by attorney general is significant not merely due to the damages and remedies sought, but because it paves the way for private lawsuits.
And make no mistake about it, this filing is a doozy. It shows the Federal/state attorney general mortgage settlement effort to be a complete travesty. The claim describes, in considerable detail, how various Bank of America units engaged in misconduct in virtually every aspect of its residential mortgage business.
The case argues on two tracks: it seeks to overturn the legal shield provided by a 2008 consent decree with Countrywide, since, in simple terms, Countrywide and BofA have flagrantly disregarded it. The case argues a separate series of claims, based on the same fact set, in case the consent decree is deemed to be operative.
The complaint describes abuses from the very outset of the securitization process: how borrowers were mis-sold mortgages (it describes how entire products were effectively predatory), how investors were misled as to their quality, how they were not conveyed properly to securitization trusts, how borrowers were subject to abusive servicing (as in charged improper and impermissible fees), how promises made under the old consent decree regarding mortgage modifications were violated (for instance, even though interest rate reductions were promised, instead modifications often resulted in HIGHER interest rates), and the filing of fraudulent paperwork to execute foreclosures.
The reason Mr. Market may not be too excited is that Nevada is not a very large state, and the civil penalties may not seem that terrible ($5000 per violation or $12,000 for elderly or disabled borrowers). But an individual loan can, and likely does, have multiple violations. The suit also seeks restitution, costs for wrongful foreclosures, plus the cost of damage to municipalities and homeowners from unnecessary vacancies (I think the last, although the damages could be huge, would be hard to quantify and therefore would not be likely to be included in a major way). Note that an AG victory on the issue of wrongful foreclosure would pave the way for private lawsuits, and here the damages would be massive, particularly if state law or precedent allows for penalties (as we’ve noted, Alabama has statutory tripe damages for wrongful foreclosure, and recent rulings have had applied penalties in excess of nine times).
And aside from the potentially significant damages to result directly and indirectly from this action is that it makes several important arguments. First, the filing has a long discussion of why the damages redound to Bank of America and not Countrywide. Nevada isn’t the first to argue that Bank of America is on the hook for Countrywide liability; bond insurers have made this case in rep and warranty cases. (Keep in mind that some of the liability, for instance, for Bank of America servicing, is properly Bank of America’s).
Note that some (including Bank of America itself, via its now almost certainly dead $8.5 billion mortgage settlement) have taken the position that really, the problem is limited to the old Countrywide operation. By implication, Bank of America could put the old Countrywide into Chapter 11 and its damages would presumably be limited to the net worth of the entity at the time BofA bought it. BofA paid a bit over $4 billion, which was a smidge under 1/3 of reported book value, so if that line of reasoning were applicable, then the Charlotte bank could be asked to stump up at most a bit over $12 billion (note that BofA may have engaged in fraudulent conveyance, but that would not change the math if this theory held water). The case argues long form that some of the misconduct was carried out by Bank of America, and in other cases, that activities perpetrated by the old Countrywide have effectively been assumed and perpetuated by Bank of America. This may explain the mystery of why Bank of America hasn’t put Countrywide into Chapter 11. If this argument is largely correct, the liability cannot be isolated to Countrywide.
Second is that the case argues (as we and other have) that Countrywide on a large scale, perhaps pervasive basis, failed to convey its mortgage loans properly to the securitization trusts. Per Adam Levitin:
[T}he Nevada AG came out and alleged a securitization fail. The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no words:
Bank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages. Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.
Notice that this section focuses on the implication for homeowners – that the foreclosures were fraudulent, but Paragraph 53 points out the implications for investors:
Countrywide did not disclose to investors that it failed to properly transfer the mortgages to the securitization trust from which they were sold…..This means that investors would not have an enforceable or secured interest in the mortgages.
The third important issue the case highlights is how servicers charge abusive and impermissible fees. The embarrassing part here, from the standpoint of Federal regulators and the “see no evil” state AGs is that this evidence is in the public domain, via US Trustee actions in four states. We’ve said repeatedly that servicer-driven foreclosures are much more widespread that is commonly acknowledged; foreclosure defense attorneys say the consist of 50% to 70% of the cases they represent. But as we have also indicated, it is too costly to fight foreclosures on those grounds (chain of title is much easier to prove), so this problem goes largely unrecognized. This is a perfect area for state AGs and the FTC to pursue, so we hope Masto’s effort wakes up some of her colleagues.
Dave Dayen discusses the implications for the state attorney general settlement negotiations. He points out that the failed Nevada consent decree with Countrywide is the very sane template that Tom MIller and the Federal regulators were using in their negotiations:
The question looming over the entire enterprise was whether the states could ensure vigorous enforcement…. And apparently no AG but Catherine Cortez Masto has actually investigated whether or not BofA kept their promises. Turns out they haven’t…
Knowing this, seeing it fully documented in Nevada, how could there still be any negotiations on a settlement with the same people? The negotiation should be about whether there will be a public or private perp walk for BofA executives….
Do you think Tom Miller, who wants a foreclosure fraud settlement in the worst way, is going to bother to check to see if BofA managed to actually give Iowans the loan modifications they promised? Of course not. And he’s likely to bully all the other states in the Countrywide agreement to shut up about how that settlement was basically unenforced, because people would get the message that this new settlement would go the same way.
He must have got to all of them, but not Masto. And she has ruined his best wishes, not to mention the best wishes of Bank of America. They are denying any wrongdoing and still claiming that “the best way to get the housing market going again in every state is a global settlement that addresses these issues fairly, comprehensively and with finality.” Bullshit. The best way to restore the housing market, the rule of law, and faith in the American system is by rounding up criminal enterprises masquerading as banks.
Now as bad as this sounds, the underlying issue is likely worse. Believe it or not, Countrywide was considered to have the best servicing operations in the industry, bar none. That was the reason Bank of America was salivating to buy that garbage barge.
Now some of the wreckage in Countrywide servicing is likely to be due to poor merger integration and cost cutting (Bank of America is a very cost driven bank). The lawsuit depicts both how mortgage servicing staff is undertrained and even when they are trying to help customers, are prevented by management from doing so (they are held to time per call restrictions that make it impossible for them to do much that is useful).
In other words, it would be bad enough if the servicing mess were, like the abusive Countrywide origination, the result of a deliberate effort to take customers at virtually every turn. Instead, this looks like an operation that might have functioned adequately in servicing current loans that is inherently incapable of servicing a portfolio with a high level of delinquencies. In a way, this should be no surprise, since they are completely different activities. You can service performing loans on a factory basis: high volume, highly routinized. Delinquent loans, by contrast, are high touch: they require more employee latitude, and therefore completely different staff and training.
And remember: Bank of America is the biggest servicer in the US. This case illustrates that its servicing is badly, hopelessly broken. The other major servicers are likely to be no or not much better.
How are we going to fix the housing market through a hopelessly broken servicing apparatus? This is a fundamental policy challenge that the Administration and its cronies among the bank toadying state AGs are trying to sweep under the rug. But the utter incompetence of Bank of America and its peers means that even the coverup and the remedies will fail, and in all likelihood too quickly and visibly for the political enablers to escape the blowback. The Administration seems not to have learned this fundamental lesson from the embarrassment of HAMP or the more recent revelation that banks are still engaging in robosigning despite their pious promises otherwise.
But it is likely to learn its lesson the hard way. Tom Ferguson’s research showed that housing values were strong predictors of votes for Scott Brown. The Obama Administration’s unwillingness to discomfit the banks and come up with real solutions to the housing mess will simply feed “vote the bums out” sentiment at the ballot box.