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.
From Bloomberg:
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.
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Rimshot:
So there I was, chortling merrily over that rimshot, when I read this:
Okey dokey, then.
Where is Rep McHenry, the browbeater of Elizabeth Warren, from? Just near Charlotte, NC and it’s BoA base.
So the guy who may want to run for Senate in NC, or at least curry favor with BoA (which has its base just next door to his congressional district) is going batshit bananas after Elizabeth Warren for wanting to provide clear mortgages and financial contracts to Americans?
What a coinkydink.
But then, I realized it gets better…. am I seeing ‘mortgage insurance fraud’ or is this simply my imagination…?
Here’s hoping the HUD inspectors get to be among the group who get the last words here, which I’m hoping will be: badda bing, badda boom!
Yves, it looks like you spotted a train wreck well in advance. From Bloomberg today:
“Bank of America Corp. (BAC), the largest U.S. lender, may face a further $27 billion of housing-related losses between now and 2013 …, analysts at Sanford C. Bernstein said.”
“The losses would be in addition to the $46 billion the Charlotte, North Carolina-based lender has booked so far, analysts led by John E. McDonald wrote in a note today.”
…
“… Bank of America shares have declined 30 percent in the past year, the worst performance in the 24-company KBW Bank Index.”
…
“The company will probably settle demands from private investors that it repurchase soured mortgages by paying about $7 billion this year, Mike Mayo, an analyst at Credit Agricole Securities USA in New York, wrote today in a research note.”
“‘The bank may need to raise capital in a share sale if housing losses wipe out earnings,’ Paul Miller, a bank analyst at FBR Capital Markets, said today in an Bloomberg Television interview with Betty Liu on ‘In the Loop.’ Ultimately, the company cobbled together by Moynihan’s predecessor, Kenneth D. Lewis, may be dismantled, Miller said.
“‘Bank of America is too big to manage at this point,” Miller said. “It’s not going to happen tomorrow, it’s not going to happen next year, but at some point down the road I think Bank of America will be broken up.’”
Friends;
The term we want to put forward here is Hubris. A good old fashioned Greek term to denote excessive pride and arrogance, which usually leads to disaster. It may just be a manifestation of just how out of touch with reality the management of BofA has become. Or, things are REALLY bad with the banks finances, and any adverse publicity is viewed with trepidation.
Add together the actions of a state (Arizona) and a Federal Regulatory Office, (described as a non captured entity) and you start to see a snowballing of effect. All it takes is one successful suit for damages and you’ll see more sharks circling than you see down at the docks when the fishing fleet comes in.
It took 5 years to build the case against Enron. The legal world works at its own pace, and it is too early to tell just who will take it on the neck who will skate through the rain without a drop on them, but some will pay, if for no other reason than someone has to be the object lesson, or the thin gruel justice at the highest levels. While providing the forensic exposure as to just what is fraud, deceptive, double speak etc, Yves, you are banging the pots and pans in the street drawing attention. And like 500 lawyers chained to a sinking ocean liner, it’s a good start. In addition to persistence, I urge patience. Relentless, unforgetting, unforgiving patience.
On its Q1 2011 financial supplement (p.64), BofA is reporting $23 billion in “past due 30+ day and still accruing” mortgage loans insured by the FHA, up from $15 billion a year ago. That is more than $1 billion per year in “accrued” interest income that BofA is reporting. BofA claims that the FHA ultimately will reimburse it for these bad loans. However, sources at the FHA say that they will not be repaying these bad loans because BofA failed to meet FHA underwriting standards and would be subject to treble damages for such claims should BofA seek repayment. This is an accounting scandal of Enron-esque proportions, yet no one is reporting on it.
Break up the biggest zombie at the zombie dance party!
Whalen:
http://blogs.reuters.com/christopher-whalen/2011/05/26/are-americans-really-benefitting-from-tarp-repayments/
down 30 % last year.wow.but what about the 50%
downer the previous three years?
ken lewis was an arrogant,incompetent ass.
and his greed and fecklessness ruined old NCNB.
i look forward to reading his name on a subpeona.
I just thought I would leave a bit of information I found interesting. I don’t know if the bloggers know of this practice BofA is requiring.
I have been negotiating a modification for some time now with BofA. In the midst of it all, I got laid off and divorced. They would talk to me at that point. When I finally did get employed they spoke to me about a modification. At this time it was just me and the bank negotiating.
They offered me a modification amount, with a 3 month trial to pay the payment. I paid the payment for 3 months on time. However, I still had my second to worry about. But, my mentality was, well I’ll pay the 1st until the 2nd comes after me. Any way… I was in the process of signing the final paper work when my negotiator surprised me with a request. He said I must first sign and “opt out” document opting out of the Making Homes Affordable program.
Well, I’m not ignorant, so I ask him what it was and why wasn’t I even told about it when first trying to modify my loan. He indicated that I said I wanted to hurry up and put something final in place… i said no such thing to the negotiator.
Any way, to make a long story short, I did not sign the opt out paper work and am now going through the Making Homes Affordable application.
I just felt they were hiding it from me. Why would they have someone opt out of a program they never new about, or applied for? However, within the next couple of weeks, I received a Making Homes Affordable packet from BofA on their letter head, like now all of a sudden they want to take credit for the program? I just feel something is fishy here.
please email me if you have any comments or concerns janie.goni@yahoo.com
Don’t we really want to know what the results of the inquiry were?
So, BAC hindered the investigation. What does that mean?
It says they didn’t get to walk anywhere they wanted and that they didn’t get everything they asked for.
Frankly this makes me think they didn’t find anything, so they are complaining about the process. They are also implying that BAC did not give them everything they asked for which is another sign they didn’t find what they expected to find.
I think Yves make a good point. Why would BAC purposefully try to piss off a regulator? So, maybe they didn’t. Maybe there was very little to find relating to this matter.
Just saying there is another side to the coin.
As I understand it, BoA acquired Countrywide to gain access to their automated loan processing software, which it quickly incorporated into the rest of BoA practices. Perhaps this is the same software that has caused so many problems.
Another bit of info I heard from a local underwriter is that BoA didn’t even do “2K” loans before it took countrywide over, at which point they started to offer them. These are loans which add a few thousand that they give to you right away, typically for home repairs and the like.
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.
One has to assume that BoA insiders were well aware of the liability on Countrywide’s part, and would only have gone along with acquiring countrywide assuming they would have to fight those legal battles. Who better to do this than those already engaged in fraudulent activities?