We said Bank of America would rue its purchase of Countrywide shortly after it took at stake in the troubled subprime originator:
[E]ven though the financial press has almost universally hailed Bank of America’s investment in Countrywide as a bold and savvy stroke, the market has remained singularly unimpressed.
I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it. The two banks had reportedly been talking for six years. That means B of A knew, or ought to have known, Countrywide very well. An article by Gretchen Morgenson in Sunday’s New York Times paints Countrywide is, at least in spirit if not the letter of the law, a criminal enterprise…. But I know lawyers who have Countrywide in their crosshairs, and I am certain they have plenty of company.
To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously.
In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it (except in liquidation or some other scenario which got rid of the incumbent management team).
It looks like Bank of America, in a misguided effort to limit Countrywide-related damage, has adopted some of its less than seemly habits, namely a disregard for oversight. Even in our current lax regulatory environment, you don’t mess around with a prosecutor or for that matter, a non-captured government auditor, like the HUD inspector general. It is funded separately from HUD and has the power to subpoena documents but not witnesses.
Bank of America Corp., the largest U.S. lender, “significantly hindered” a federal review of its foreclosures on loans insured by the Federal Housing Administration….
“Our review was significantly hindered by Bank of America’s reluctance to allow us to interview employees or provide data and information in a timely manner,” William Nixon, an assistant regional inspector general for the agency, said in a sworn declaration.
The declaration, dated June 1 and obtained today by Bloomberg News, was filed as an exhibit in a lawsuit by the state of Arizona against the Charlotte, North Carolina-based bank. Arizona, which is seeking to interview former Bank of America employees, accuses the bank of misleading homeowners who were seeking mortgage modifications….
The HUD inspector general’s office conducted reviews of the five largest servicers “as they relate to FHA loans that have been foreclosed upon” and for which the servicers claimed insurance benefits, according to Nixon’s declaration. The office sought to determine whether Bank of America complied with applicable procedures when conducting foreclosures on FHA- insured loans…
The HUD inspector general’s report on Bank of America, which hasn’t been made public, was prepared “in light of possible future litigation,” according to Nixon’s declaration. Nixon, who works in Fort Worth, Texas, couldn’t be reached for comment.
Bank of America submitted 40,219 FHA claims totaling $5.7 billion from Oct. 1, 2008, through Sept. 30, 2010, according to the declaration. About 86 percent of its claims were for loans previously serviced by Countrywide Financial Corp., which Bank of America acquired in 2008.
Even if BofA’s penalties on these FHA claims turns out to be a significant portion of the total amount, it is not enough to constitute a major blow to the Charlotte bank, which then makes one wonder why it would obstruct the investigation (of course, the lender denies it did any such thing). Perhaps the drip drip drip of liability on so many fronts is leading to some desperate measures to plug the leak.
Update 1:15 AM: Shahien Nasiripour of HuffPo posted the two relevant court filings and provided more detailed commentary:
Bank of America, the largest handler of home loans in the U.S., threw up roadblocks to the investigation, Nixon said, like preventing his team from performing a “walkthrough” of the bank’s documents unit.
The bank also failed to fully comply with subpoenas issued by Nixon’s team. HUD’s internal watchdog issued two subpoenas requesting documents and information, and what was returned was incomplete, had conflicting information, and in some cases, the bank provided excerpts of documents rather than the complete record.
In one instance, Bank of America supplied only a third of what the watchdog requested.