Bank of America Being Pushed Toward Receivership

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

see Early Stress Test for the Financial Stabilitiy Oversight Council

Editor’s Comment: Simon Johnson warned us this day would come. And he wasn’t the only one. In the article below he describes BOA’s position as “precarious,” arising from the growing number of claims from investors who “purchased” Mortgage bonds or some similar derivative or synthetic derivative. They want their money back, 100 cents on the dollar and BOA doesn’t have it.

Estimated claims are now between $50-$100 billion MORE than those already disclosed, with a high probability that the estimates will rise just we saw in 2007-2008. Johnson, a former economist for the International Monetary Fund (IMF) echoes the opinions of many other analysts that there is even the possibility of the losses rising back into the trillions for the players in the securitization market. With a bailout all but impossible both politically and economically, BOA seems to have painted itself into a corner perhaps more so than the other mega banks.

With others wondering if BOA will be downgraded from present ratings, it looks to me like we are seeing the re-play I predicted 2 years ago. The problem that won’t go away is that these deals are nearly pure vapor. The homes were given inflated appraisals that were confirmed in a non-existent underwriting process, that frequently charged no-doc customers an extra point or more per year in interest to offset the non-existent “risk.” The applications were fabricated by loan brokers and loan originators and the only thing that happened was that a lot of people were given access to the flow of money without any paperwork to back it up. Access to the money is not the same as ownership of the loan and a bad loan is never going to get better without major renovation.

The put-back liability stems from the contractual promise that industry standard loan underwriting practices would be used with homeowners seeking financing. There was also the hidden yield spread premium that investors are starting to get acquainted with, and what they see, they don’t like. So the promise was that good business practices, lending practices and industry standard underwriting would be the way things were done. We all know that didn’t happen. Whether the investors’ claim (or the FED or the insurers, or the counterparties on credit default swaps) is based on fraud or on breach of contract, the results are basically the same with the chaser being the possibility of treble damages. BOA doesn’t have that kind of capital even if it “finds” the tier 2 YSP money that disappeared between what they took from investors and what they actually funded in loans.

For reasons that can only be attributed to cultural attitude, the claims of the borrowers of wrong-doing, title snafu, deceptive and wrongful lending practices, and appraisal fraud are being taken more seriously when they come from suits costing $2,000 more than the threads of homeowner’s lawyers. The claims are considered real and based on sound legal grounds. In plain words, the investors funded $1 on property worth 20 cents. Homeowners accepted liability of 50 cents for the property worth 20 cents. Investment bankers pocketed the unfunded money from investors and deceived them and the homeowners with misrepresentations of the size and quality of the loans.

Bottom Line: The banks have a double liability in both the direction of the investor who loaned the money and the homeowner who borrowed it. Some very intelligent people let arrogance make them act incredibly stupid. Now, like all Ponzi schemes, the game is over, no new money is coming in, the house cards has collapsed and like with Madoff, people all want their money back or the deal they signed up for. Like Madoff, the money isn’t there. And to make matters worse, the losses on the credit default swaps that taxpayers bailed out were not losses, as we have been saying here for many months.

The real losses were incurred by the investors, the homeowners, then the Fed, insurers and other parties. As far as I can see, there is no way out for BOA. And Federal policy needs to follow the lead of the 50-state policy of forcing modifications where the loans are corrected to reality and terms adjusted to make it appealing for all parties to sign on. Otherwise, the homeowners all get their homes for nothing and the investors suffer a 100% loss — especially if BOA goes underwater (pardon the pun). And then of course there is the question of jail, as each of the junior people flip over on people who were their superiors. I’d rather see a settlement where our society is put back on track than get the satisfaction of seeing a few people go to prison. True, they belong there if there is proof of a crime, but it doesn’t fix anything.

Unless settled confidentially, these investor demands (including the Federal Reserve’s demand, and the insurers who already forked over billions and now disclaim further liability) will almost certainly prove the borrower’s claims that are based essentially on the same facts and mostly the same theories of law.Victory by the investors will be a victory for borrowers and vica versa.

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An Early Stress Test For The Financial Stability Oversight Council

with 82 comments

By Simon Johnson

How much damage to the financial system should we expect from what is now commonly called the foreclosure morass, the still-developing scandal involving document robo-signing (and robo-dockets), completely messed up mortgage paperwork and high-profile inquiries into accusations of systematic and deliberate misbehavior by banks?

The damage to banks’ reputation is immeasurable. They have undermined property rights – the ability to establish clear title is a founding idea of the American republic. They have mistreated customers in a completely unacceptable manner. If anyone doubted the need for a new consumer protection agency dealing with financial products – and the importance of having a clear-thinking reformer like Elizabeth Warren at its head – they are presumably silenced by recent events. (If you need to get up to speed on the basics of this issue, see this series of posts by Mike Konczal.)

But what is the cost in terms of additional likely losses to big banks? The likely size and nature of these are leading to exactly the kind of systemic risks that the Financial Stability Oversight Council was recently established to anticipate and deal with.

It is hard to know how the precise numbers for losses will end up, so much uncertainty remains about the basic parameters of the foreclosure problem. A lot of smart people are looking for ways to sue the big banks – in particular to force them to take back (at face value) securities that were issued based on some underlying degree of deception.

This is a fast-evolving situation in which every day brings potentially significant news, but our baseline view is that the losses are in the range of $50 billion to $100 billion – that is, these are “new” losses not yet recognized by banks. (Our downside scenario, with perhaps a 10 percent probability, is that the losses are much larger.) Most of this is so-called putbacks to the banks from Fannie Mae and Freddie Mac, meaning that the banks are forced to take back on to their books the underlying securities (and absorb the associated losses) if there was significant misrepresentation in the original documentation.

In almost all scenarios, these additional losses will remain an order of magnitude smaller than the trillions of dollars in credit losses that brought down the global financial system in 2008-9. Still, these latest losses are not helpful to confidence in big banks, and the continuing uncertainty – which is entirely the banks’ own fault – will make their managements more cautious about extending new credit.

Capital is the buffer that banks hold against losses, and banks really do not want to raise more capital under current conditions. Their executives’ fear about potentially having insufficient capital will further undermine loan availability, even for creditworthy borrowers. This is exactly what the economic recovery does not need.

In addition, Bank of America is a particular worry, because its capital position is already precarious and any downgrade by rating agencies will push it into dangerous territory. To the extent the market believes that the government does not stand fully or immediately behind Bank of America (a view expressed by Morgan Stanley analysts in a note this week), we should expect pressures reminiscent of fall 2008  We also learned yesterday of sizable additional potential exposure from the lawsuit filed by the Federal Reserve Bank of New York, PIMCO and BlackRock — seeking to force Bank of America to buy back bad mortgages packaged into $47 billion of mortgage-backed securities issued by Countrywide.

The best approach would be a fresh set of stress tests, resulting in the requirement that Bank of America and perhaps other banks need to raise a specified dollar amount of capital (not hit a particular capital-asset ratio, as that would just result in further dumping of assets), and reassuring the market that other banks have sufficient capital, including under the augmented Basel III requirements. (For a primer on capital requirements and the thinking that underlies the approach we are recommending, see our post of Oct. 7.)

Created by the Dodd-Frank financial regulatory act, the Financial Stability Oversight Council has plenty of power to order and organize such stress tests. In fact, because of the powers granted to the council under the Kanjorski Amendment, the country’s top regulators have a complete menu of choices available in terms of what they can require banks to do in order to reduce risks to the system (up to and including preemptively breaking up big troubled banks).

The foreclosure morass clearly poses systemic risk, both through its general effects on uncertainty about losses and because any manifest weakness at one big bank could spread – in some obvious ways and in some unanticipated ways – through the rest of the system.

In addition, the stress tests of 2009 (known as the Supervisory Capital Assessment Program) did not consider the possibility of large losses arising from the litigation now surrounding mortgage-backed securities. When Representative Brad Miller, Democrat of North Carolina, asked Treasury Secretary Tim Geithner about this at a House Financial Services Committee hearing on Sept. 22, the exchange went like this:

MILLER, asking about possible breach of contract in securitized mortgages: Okay. was potential liability on these theories taken into account at all in the stress test? I mean, the securitizers, who presumably would be the defendants in any litigation, are the 19 biggest banks that got the stress tests, was their potential liability taken into account at all in the stress tests a year ago?

GEITHNER: I…I don’t think so….

Mr. Geithner also said he would take this question up in more detail with his colleagues at the Federal Reserve, which administered the 2009 stress tests. The exchange can be heard in full online, with the Miller-Geithner exchange at about the 42-minute mark.

The only fair, reasonable, and safe way to handle this situation is to order a fresh round of stress tests for all systemically important financial institutions. The stress scenario should consider not just the current dismal macroeconomic prognosis (and the potential for another slip back into recession) but also the downside with regard to litigation losses.

If the Financial Stability Oversight Council refuses to act decisively in this regard, a vital piece of the Dodd-Frank financial reforms will have failed.

27 Responses

  1. […] (LivingLies) – Bank of America Being Pushed Toward Receivership – Read More Here […]

  2. Financial Fraud and Bailouts, yet another violation of our rights. Add it to the list of gov’t violations of our right:
    They violate the 1st Amendment by placing protesters in cages, banning books like “America Deceived II” and censoring the internet.
    They violate the 2nd Amendment by confiscating guns.
    They violate the 4th and 5th Amendment by molesting airline passengers.
    They violate the entire Constitution by starting undeclared wars for foreign countries.
    Impeach Obama and sweep out the Congress, except Ron Paul.
    (Last link of Banned Book):
    http://www.iuniverse.com/Bookstore/BookDetail.aspx?BookId=SKU-000190526

  3. http://www.scribd.com/doc/40680566/Davies-1st-and-2nd-Notes-Dot-Endorsed-IN-BLANK

    NOTES ENDORSED IN BLANK, ALSO ORIGNIATOR ALLONGE

    http://www.scribd.com/doc/40680237/Indymac-Final-Docs-2-FROM-RAST-2007-A5-WAREHOUSE-COLONIAL-BANK-INVESTOR-INDYMAC

    SCREEN SHOT FROM INDYMAC–CLOSING DOCS FOR THE RAST 2007-A5. NOTE COLONIAL BANK A WAREHOUSE LENDER HAS AN ACCOUNT NUMBER, TOOK THE LOAN AS COLLATERAL AND DOES NOT SHOW UP ANYWHERE

    ANY COMMENTS.

  4. Here in Mass the Banking Commisions only goal was to get a big fine from the Brokers and the homeowner’s were given forclouser notices. Cover up from the get go. Know of a case that was presented 2 years ago and now div of Banks have no record of the complaint. Also, with predatory lending involved in mass the files are to be given up to 5 years. And I belive if the files were open then it may be till resolved.

  5. Bob G.

    If loans were prearranged and purchased before or at closing – there should be NO yield spread premiums. Nothing was done by the broker to facilitate a better interest rate loan for you – the deal was already prearranged and DONE. And, yet these YSPs were reflected in higher assessed interest rates -when there was no “work” done on behalf of borrower searching for best interest rate – because – it was already – prearranged.

    Fraud in origination is up to the states to investigate. And, the state DOJs and Banking Commissions have control over the origination – including the brokers. But – up until now – they did nothing. Heard of one state who told borrower that records are only kept for 3 years – so they cannot investigate. Well, these mortgage loans were converted (by accounting) into securities – security retention is MUCH longer. So – why have the DOJs and Banking Commissions – DONE NOTHING – until now?

  6. I don’t understand the allegation of hidden yield spread accounts. It’s clearly spelled out in the PSAs.

  7. Receivership to me means more FDIC injection. Then they will have things fabricatied to have a positive outcome for the FED. Dissovle would be a better solution and release all the homes back to there proper owners, the home owner.

  8. I also believe that this time around the FEDS must put a number of people from each of the major players in the pokey. Order orange jumpsuits to fit Barbara Desoer. May she get a job in prison cleaning the sewer. Then she be ‘in d’ sewer”,

    Such a nice rhyme, and it is high time.

    CountryWide and the AG settlement agreement have set me up for 2 years of grief. They need to get theirs now.

  9. PJ,

    I believe that BofA was forced to take Merrill-Lynch but the acquisition of CountryWide by BofA was NOT with any force from the feds.

  10. Now is the time to change the course of history. A golden opportunity (provided by the banks themselves) now presents itself to seize the offending institutions, break them up and avoid a bailout, while suturing the gash that caused the crisis in the first place.

  11. What a wonderful thing.

    I’m going to add a BIG BOYCOTT of all foreclosing banks, to this, to help that along. Anyone that lies to me is not worthy of my business.

    No more visas, no more transaction fees. No more fractional reserve profiteering from my deposits.

    Goodbye thief.

  12. http://www.scribd.com/doc/40644092/National-Mortgage-News-SEC-Wants-Disclosures-on-Buybacks-and-Foreclosures

    The Securities and Exchange Commission wants publicly traded depositories to provide “clear and transparent” disclosures on the impact mortgage buyback and foreclosure reviews will have on their bottom line in future quarters.

    TROUBLES AHEAD.

  13. what happens to the loans and all the issues reaised with BofA if it is recievership?

    Do we now have to start over with negotiationg short sales or lawsuit settlements?

    Can you still sue BofA for damages?

    What happens to the home owners and the mess or our upside down loans.

  14. And where is the California AG? Wells Fraud & Co. continues its fraudulent foreclosures unencumbered and abetted by the Judges of this state. Now they sell these homes “as is” in an attempt to skirt responsiblity for title defects and on they go, foreclosing and selling. It is surreal that the foreclosures continue in this state.

  15. Let them all fall. F%$# the banksters….STOP DOING BUSINESS WITH THESE PIECES OF S%$#….

  16. Do not forget the most notorious bank of all – Wells Fargo and US Bank . Both are deceitful bastards.

  17. THE A MAN

    Never forget – This was calculated deceit and they got caught. They owe you money and they belong in jail.

  18. Just sayin keep in mind it was the elected officials that forced BofA to absorb Country Wide in the first place… after which Mozzillo got off with a slap on the wrist & a fine!

  19. Neil, it’s a rare day that I take exception to your comments, but this is one of those days. You wrote:

    “And then of course there is the question of jail, as each of the junior people flip over on people who were their superiors. I’d rather see a settlement where our society is put back on track than get the satisfaction of seeing a few people go to prison. True, they belong there if there is proof of a crime, but it doesn’t fix anything.”

    There is no possible way this situation can be made whole without the moral compass being reset to an earlier accepted norm. It’s been spinning wildy, with many thousands of people apparently accepting that it’s ok to inflate appraisals, that it’s ok to adjust incomes to whatever is needed to qualify, ok to backdate, forge, lie, cheat, there’s not enough room on this blog to put it all down.

    Until society agrees to a great reset, where morality again rules, and the thievery is punished, we can’t move forward. And if that’s the case, society doesn’t stand a chance.

  20. Millions of homeowners keep paying on underwater mortgages
    The payments absorb billions of dollars that might be used for other forms of consumer spending, creating a drag on the overall economy.

    http://www.latimes.com/business/la-fi-economy-mortgages-20101101,0,7338975.story

  21. BofA going into receivership? Wow, that made my day. Now, all of this terrible nightmare of melting mortgages will finally get the attention it needs. Right after the election is over, it will go viral in the mainstream news, ha, ha.
    http://www.challengingforeclosure.com
    Sirak@challengingforeclosure.com

  22. After all I and my family has been through for the last two years they owe me money.

  23. “They Will Suffer The Consequences” Says South Carolina Chief Justice Of ‘Corner-Cutting’ Foreclosing Lenders Involved In Robosigner Scandal In South Carolina, The State reports:Across courts in South Carolina, judges say they are halting more foreclosures — as many as one in four —because lawyers for banks have incomplete documents or missing paperwork. They also are starting to see the challenges to the authenticity of signatures on foreclosure documents that have made headlines in recent weeks. “Everything happening in the paper is happening across the state,” said James Spence, the Lexington County master-in-equity, the judge who oversees foreclosure cases in that county.

    http://www.scribd.com/The-State-10-31-2010-Paperwork-Woes-Plague-South-Carolina/d/40623207

  24. D.C. Attorney General Peter Nickles: “…..the requirement for recording every transfer of mortgage “is not satisfied by private tracking of mortgage interests through the Mortgage Electronic Registration Systems.” ….”

    http://www.scribd.com/doc/40622439/Attorney-General-Issues-Statement-on-Foreclosures-in-DC-Releases-Office-of-the-Attorney-General

  25. WHAT DOES RECEIVERSHIP MEAN FOR:

    1) Claims against BofA for RESPA QWR violations
    2) Claims against BofA owned BAC Home Loans Servicing, LP claims for RESPA QWR and FDCPA violations/
    3) Other claims to stop a nonjudicial foreclosure.

    Is it business as usuall?

  26. It couldn’t happen to a better bank. May the others also follow.

    Maybe only then, if and after BofA is in receivership, our loans will finally be restructured.

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