Yves here. As the headline indicates, the steps taken Bank of America that Michael Olenick describes in this article call into question the idea that Bank of America can shield itself by putting Countrywide into bankruptcy. Note that, some litigants, particularly AIG in its petition in opposition of the proposed $8.5 billion settlement of putback liability on 530 Countrywide trusts, made a persuasive case that Bank of America has operated Countrywide in such a way post acquisition so that it is no longer bankruptcy remote from BofA (that is, you can’t BK Countrywide and deny Countrywide creditors access to BofA assets).
Nevertheless, as attorney and former monoline executive Tom Adams noted by e-mail, the reason Bank of America might want the servicing at BofA rather than Countrywide if Countrywide is put into bankruptcy is probably to avoid a servicing termination event. If the servicer is bankrupt, the trustee or investors could, in theory, terminate them as servicer. This is really only theory, because almost no one (other than BofA) would want to be servicer for these loans, so it would be hard to see it as a driver of the changes Olenick describes.
An interesting related issue is that BofA, like other servicers in this new world of costly and lengthy foreclosures, is at risk of over advancing on mortgages. Servicers advance principal and interest even after a borrower has defaulted and reimburse themselves when the foreclosed property is sold. In theory, they can stop when a loan is clearly irrecoverable. In practice, historically many servicers have kept advancing up to the full principal balance of the loan. With loss severities rising and more borrowers fighting foreclosures, they can incur more costs than the house is worth, but on average, they still recover their advances. But with foreclosure timelines attenuating, legal costs escalating, and foreclosures grinding to a halt in states like Nevada, New York, and New Jersey, where they are now real sanctions for filing questionable foreclosure documentation, servicers face increasing doubts about their ability to recover advances from the proceeds of home sales. I hope the FDIC is watchful enough not to allow deposits to be used to fund servicer advances.
By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha)
Bank of America’s subsidiary BAC Home Loans has filed foreclosures in FL under 286 slightly different names. For example, in the 28 Florida counties that I track, “BAC Home Loans Servicing” has 6,089 filings, “BAC Home Loans Servicing LP, FKA Countrywide Home Loans Servicing LP” has 5,657 filings, “BAC Home Loans” has 3,050 filings, and “BAC Home” has 2008 filings. Altogether there are 21,913 filings.
Bank of America has filed under 283 different names. Most are variations one would expect but some pop out: “Bank of America NA, SBM Countrywide Bank FSB” has 85 filings. Altogether there are 44,504 filings with some derivation of the name Bank of America.
Robo-signing slowed down BAC filings, like it did all filings, though as the leaves fell from the trees in the northern states, so did the filings in the name of BAC Home Loans. I track 359 filings in June, 2011; 321 filings in July, 28 filings in August, nine filings in September, and twelve filings total in the fourth quarter.
But Bank of America didn’t stop filing; they actually increased their volume. In June, 2011 Bank of America filed 178 foreclosures; 169 in July, 362 in August, 471 in September, 579 in October, 452 in November, and 76 in this first week of December.
I spent Monday with Sean O’Toole, CEO of ForeclosureRadar.com. Sean tracks foreclosures in several Western states: his data is impeccable. We saw the same trend in CA foreclosure filings. That is, filings as BAC Home Loans ratcheted down dramatically while filings as Bank of America surged. Whereas overall Florida filings were up slightly, overall CA filings had an even sharper uptick, though as Bank of America, not BAC Home Loans.
Just to repeat: in the two state’s arguably most hard-hit by the foreclosure crisis foreclosure filings by the subsidiary set up to handle Countrywide loan servicing, BAC Home Loans, trended down to negligible levels while filings as Bank of America, the FDIC insured bank, took their place.
On Tuesday, Dec. 6th, Brian Moniyhan was asked by Reuters about the possibility of putting Countrywide into bankruptcy and replied “We always have options but .. we’ve got to move through this in a way that doesn’t disrupt the company,” Moniyhan replied, implying — though arguably in the obtuse way that lawyers do — bankrupting his Countrywide division remains an option.
Since foreclosures must be filed under the name of the party that can enforce the obligation — there’s an out-of-scope raging debate whether that means the servicer, trust, or both — it’s fair to conclude that Bank of America made a cognizant decision in the third quarter to fuse the Countrywide junk pile with the insured central bank. I’m not a corporate bankruptcy lawyer but it looks extremely unlikely, in the context of the changes to these foreclosure filings, that Bank of America retains the option to bankrupt Countrywide without affecting the insured bank.
The changes to Countrywide come at the same time that Bank of America has been pushing regulators to transfer the $75 trillion of derivatives it inherited through the acquisition of Merrill Lynch into the insured bank. They’ve already transferred most of that junk pile, though it is not clear whether regulators will force them to roll-back part or all of the transfers.
BOA has set aside $16.3 billion for “put-back” liability claims; the ability of investors to force a bank to repurchase failed mortgage-related securities. This liability usually stems from material misrepresentations in Pooling & Servicing Agreements (PSAs), the contracts governing the process that allow banks to sell pieces of bundled mortgage to third parties. That sounds like a lot of money except that AIG has already sued BOA for $10 billion on the grounds that the bank, or agents of the bank, essentially lied to the insurance company enticing it to write a type of non-regulated default insurance called a Credit Default Swap (CDS), against mortgage securities they knew were filled with lousy loans.
In addition to the $10 billion AIG lawsuit, the Federal Housing Finance Agency (FHFA), which effectively controls Fannie Mae and Freddie Mac, has also sued the parent bank for $6 billion in put-back liability, sued BOA-owned Merrill Lynch for $24.8 billion, and sued Countrywide for $26.6 billion.
Granted, the securities BOA would have to repurchase aren’t worthless; there are still some people paying even the lousiest loans back. But thanks to the failure of the GSEs to disclose loan-level information, an abject lack of opacity into the CDS contracts, and mark-to-model accounting that leaves investors blind we don’t really know what any of these instruments are worth. But it’s probably fair to say that the $16.6 billion will come nowhere close to covering the liabilities of just those lawsuits, much less the dozens of others either being drafted or in progress against the bank on various fraud liabilities.
In summary, evidence suggests BOA has transferred Countrywide to the parent bank, and that — because of the Countrywide and Merrill liabilities — they’re effectively bankrupt. They tried to keep the party going but eventually even Bernie needs to be buried.
In November, 2010, Moynihan famously promised investors “day-to-day, hand-to-hand combat” against put-back liability claims. Now, a year later, it’s clear that the combat isn’t going so well. Bank of America lays beaten and bruised; their own underwriters would be crazy to make a loan to themselves if they were objectively evaluating the risks. During the 2011 combat Moynihan himself has been personally flipping thousands of shares he acquires for nothing each month, even as the banks stock price keeps plunging, according to SEC filings.
By bringing Countrywide, along with the Merrill junk pile, back into the fold it appears BOA is holding itself hostage. I’m just guessing but their ransom demand is probably the only “business” they’re good at anymore: demanding bailouts. Whether it’s a direct or indirect bailout, from the Treasury, the Federal Reserve, their regulators, and/or their counterparties, the modern-day equivalent of Reagan’s Cadillac driving welfare queens are anteing up to demand a Bugatti.
It’s not clear whether the FDIC has the Cajones to seize this perennial basket case, or whether we’ll see a return of hypocritical Too Big To Fail policies where personal responsibility is only for, in the words of the late Leona Helmsley, the little people. Contractors, plumbers, electricians, and other middle-class workers lose their homes, their credit, and their money when they make bad decisions; Bank of America basks in billions. Bailouts and bonuses for bungling one’s bank .. for the public good, of course.
It would benefit mortgage borrowers if a vulture firm had the opportunity to buy BOA’s mortgage loans for a few cents on the dollar, because there would be lots of room to reduce principal and still make a profit on the loans. Even better, regulators could allow people to purchase their own home loans out of the pools, from a bankrupt Bank of America, at the price the discount the loans are selling for at open, non-government supported auction after a slight administrative fee.
Forced liquidation of the notes, at rock-bottom prices, would organically allow the market to reduce principal and begin to put a floor in the housing market. Everybody, including and especially Bank of America, says that’s what’s needed as a long-term fix to the housing mess. Of course, BOA would presumably rather see that happen through government subsidized foreclosures rather than the unsubsidized liquidation of their bank.
Disclosure: I covered my own short position in BAC several weeks ago, before I’d confirmed the trend to file as BAC was also in-place in CA. I will not take a new position in BAC until this article is published. Even then, I’m not sure whether it’s safe to bet against government intervention on the part of the American aristocracy. I also have long-term call contracts on AIG, because I believe their claim against BOA is meritorious and I’m hoping they’ll file similar claims against others.