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EDITOR’S NOTE: ALL the banks are actually in the same boat. The assets they are reporting on their books — mortgages that they never owned and in which they were not the lender — are pure vapor. There is only so far much room to kick the can down the road. BOA is headed down.

Mortgage Woes Stall Bank of America’s Revival

By BEN PROTESS
Brian T. Moynihan, Bank of America's chief executive.Chuck Burton/Associated PressBrian T. Moynihan, Bank of America’s chief executive, is struggling to rebuild the bank after the financial crisis.

As big banks slowly shake off losses from the financial crisis, Bank of America provided another reminder on Friday of how hard it is to shed the legacy of the past.

Bank of America, the nation’s largest bank, reported that first-quarter earnings dropped 37 percent to $2 billion, reflecting the persistent burden of Countrywide Financial, the subprime mortgage lender it bought in 2008.

Two days earlier, its rival JPMorgan Chase announced that profits rose 67 percent over the same period, despite continued problems in its mortgage-lending unit.

The different results between the two financial giants underscore the continued challenges that Bank of America’s chief executive, Brian T. Moynihan, faces as he tries to rebuild a company weighed down by a troubled mortgage business in an uncertain economy.

“Other than the mortgage issue, Bank of America is having the same kind of recovery everybody else is,” said Chris Kotowski, an analyst at Oppenheimer & Company.

In many ways, Bank of America and JPMorgan followed similar paths in the first quarter. Credit quality markedly improved, allowing the banks to release billions of dollars of reserves previously set aside to cover losses. Commercial lending is on the mend, and investment banking fees are rising.

The two banks are even struggling in the same ways, with revenues declining in the first quarter. Both were hit by new government regulations that limited overdraft fees and other lucrative sources of income. And their home-lending businesses continued to lose money, although loans were souring at a slower rate. At Bank of America, net charge-offs for the quarter were $6 billion, compared with $10.8 billion a year ago.

“We’re cautiously optimistic,” the departing chief financial officer, Charles Noski, said. Except for “our legacy issues, you have a business that has articulated its strength and we’re executing on it.”

But Bank of America won’t be able to escape its mortgage woes anytime soon. Its problems are not unique. Like its peers, Bank of America is dealing with a wave of litigation and government investigations related to its mortgage business — albeit on a grander scale given its acquisition of Countrywide, once the nation’s largest mortgage lender. The bank put aside an additional $1 billion in the first quarter to cover claims linked to Countrywide.

Compared with competitors, the bank has more loans on its books that are past due and nonperforming, according to a recent report by Oppenheimer. And it is unclear just how much liability the bank ultimately will face, a situation that continues to plague the bottom line.

“With Bank of America, you’ve got this special asterisk: There’s no precedent to judge their exposure,” Mr. Kotowski said. “If not for that, I would be recommending the stock.”

In a nod to its legal issues, Bank of America on Friday announced the creation of a new position, the global chief of legal, compliance and regulatory relations. The bank named Gary Lynch, formerly of Morgan Stanley and the Securities and Exchange Commission, to fill the role. Mr. Lynch, the S.E.C.’s enforcement director in the 1980s, carries clout on Wall Street and in Washington.

Bank of America also said that Mr. Noski would leave his post after only a year to tend to “a serious illness of a close family member.” Mr. Noski — who will be replaced by Bruce Thompson, the bank’s current chief risk officer — will remain at the company as vice chairman.

Shares of Bank of America closed at $12.82 on Friday, down nearly 2.4 percent.

Bank of America acquired Countrywide during the depths of the financial crisis for $4 billion — a price that seemed fair at the time. But Countrywide soon proved to be at the epicenter of the mortgage mess, and the costs have been piling up ever since.

Now, institutional investors, government-sponsored enterprises and mortgage-bond insurers want Bank of America to repurchase billions of dollars in bad Countrywide mortgages, which they say failed to meet underwriting standards. On Friday, the bank announced a $1.6 billion agreement with Assured Guaranty, the insurer that guaranteed several mortgage-bond deals backed by Countrywide loans.

The legal problems don’t seem to be abating, either. Bank of America paid about $3 billion to Fannie Mae and Freddie Mac in the fourth quarter of 2010 to settle the housing finance giants’ repurchase claims. Now, they want more — with claims of $5.3 billion, up from $2.8 billion in the fourth quarter of 2010.

The bank is among several firms ensnared in state and federal investigations into fraudulent foreclosure practices. The bank and 13 other firms signed an agreement with banking regulators on Wednesday to overhaul their foreclosure operations and adopt new oversight procedures.

But the bank and its peers still face demands from state attorneys general to make additional concessions, including a multibillion-dollar settlement.

“Countrywide is a disaster,” said Paul Miller, an analyst at FBR Capital Markets, adding that the first quarter’s problems “will not be the end of it.”

In contrast, the bank’s merger with Merrill Lynch, another marriage forged during the crisis, has fared far better. The global wealth management group, which includes Merrill, reported revenue of $4.5 billion, versus $4 billion a year ago. Earnings rose more than 22 percent.

It is a crucial time for Bank of America, which is hoping regulators will approve a plan to increase the bank’s token 1 cent dividend. In March, the Federal Reserve rejected the bank’s proposal to raise its shareholder payouts in the second half of 2011. The bank said on Friday that it would try again, although analysts are skeptical of its chances.

“I think, eventually, the bank will have to back off” from raising its dividend, said Marty Mosby, an analyst at Guggenheim Securities.

21 Responses

  1. Anonymous

    You are right on about problems before Countrywide was purchased. I know because I am one of them.

  2. Who wants to take on the meaning of “true sale”?

  3. Okay, please bear with me. I redid my little thoughts:
    The note is nothing. The only reason it is even held for the trustee by the custodian of the trust/trustee is to bear witness to an event which has (already) occurred. Is this what is meant by the ‘trust’? The Trust is that the trustee retains the notes as evidence of the debt purchased? The notes went into the spv, remic, sami, w/e, right, or should have?
    This evidenced the debt being bought by the investors. Securities were then bought by the investors, based on the note debt.
    They did not buy the notes, although the notes were essentially sold. (Dang) I don’t get the note plus my securities, right? If I could, sign me up.
    The notes only evidenced the debt purchased. The notes could have been destroyed. However, their ‘existence’ provides evidence of the debt the investors bought, though nothing else. Nada. The custodian only retains notes as proof of the debt the securities evidence / bought. Or, someone else altogether wanted the notes retained.
    Some of these ‘someones’ have gone so far as to manufacture them.

    The notes and the securities can not exist – as ‘enforceable or real paper’ – at the same time. The notes were the ‘reason’ for the securities.
    The notes, which are now only evidence of the debt purchased as securities, are not enforceable because they are dead, their only purpose to evidence WHAT debt the securities bought.

    The master servicer or someone guaranteed the payment stream on the debt purchased as securities / derivatives (on info and belief). Ouch. No, I don’t know why they would do this. I do feel that FNMA’s webiste provides some support for the proposition that servicers make a certain amt of ‘default’ payments, at least, and it also appears that FNMA reimburses servicers for these advances. (Yet claims are turned in which do not include these reimbursements – on a lot of loans, that’s a lot of money ,and even if I’m in left field, generally, here, think about that – they get reimbursed for ‘advances’ and then sock it to the investor again for those same advances, far as I can tell. Then, they enter into some going-nowhere trial modification and get more payments yet from the homeowner. )

    The UCC is not applicable because while it is relevant to notes, the notes, they be dead! Since the notes are dead, there is also no collateral. When contemplating what this looks like, we might remember that the homeowner didn’t start the fire nor add the major fuel to make it the firey inferno.
    “They” got their TARP funds. Billions and billions.

    And why would an endorsement in blank ever be warranted? Well, might an endorsement to the name of the spv or w/e have been reasonable? Probably. The only reason I can think
    of for a blank endorsement is because MERS’ members planned to use the dead notes to go after unsecured real property, now alleging possession of a bearer note. Who do we suppose penned these securitization agreements which sometimes if not always provided the note could ultimately be endorsed in blank – as an “alternative” to special endorsement?
    And has anyone ever, ever seen a note endorsed to a trust or an spv or remic or sami or whatever?

    First they skipped the notes altogether when foreclosing. Sneaked up on all of us, including the judiciary.

    Now, as we have made some legal in-roads, it’s going to be all about the alleged possession of bearer notes. Not! The note went into some vehicle (maybe, and we should give them some of their own mulberry bush treatment and make them prove it for grins and giggles), but it did NOT come out. It died in there.

    If this is true, and of course can’t swear it is, there are no mortgage-backed securites. What there might be is guarantee-backed securties. And you just can’t buy back a dead note even if that note were recourse or like that. You could re-purchase the securties or derivatives or whatever that was were that ‘came out’ …?

    Zurenarrh has posted another version which seems logical. Maybe the truth is somewhere in the middle?

  4. John Gault–intriguing posts. I have read your argument on this site before, i.e., that the securities and the promissory notes cannot co-exist. I forget who made that argument, but the concept is familiar. I’m not sure I understand the concept exactly, but what follows is how I think of it…

    1. The pretender lender sells my note to someone, let’s say Fannie Mae.

    2. That sale of the note should mean that the pretender lender no longer has any claim to the proceeds from my note–Fannie Mae does.

    3. Fannie Mae takes my note and supposedly pools it with–let’s say–1,000 other notes.

    4. Fannie Mae then sells an “undivided beneficial interest”–represented by certificates–in that pool of notes (which supposedly contains my note) to investors.

    5. Fannie Mae’s MBS documents explicitly state that all the notes in the pool are being held in trust–by Fannie Mae–for the benefit of the holders of certificates and that Fannie Mae engaged in a “true sale” of all the notes to the trust/pool.

    6. That means that, just like the pretender lender sold my note to Fannie, Fannie has now sold my note to certificateholders/investors and therefore Fannie Mae is no longer entitled to the proceeds from my note.

    7. That also means that, under the standard language of real estate promissory notes, Fannie Mae does not fit the definition stated in the language of the promissory note, namely: 1)taken the note by transfer and 2)entitled to payments under the note.

    8. However, Fannie Mae claims to be the principal in a foreclosure action, directing its agent servicer to take my house. But according to the scenario outlined above, neither Fannie nor the certificateholders are the “note holder” defined in my note because: 1) Fannie supposedly took the note by transfer but is not entitled to the payments and 2) the certificateholders/investors are entitled to the payments but never took the note by transfer.

    That is effectively the same as the note being “dead” because when a situation like this arises, whether with Fannie or with a non-GSE trust, the “Note Holder” no longer exists. However, the judges are being fooled–or just playing along with the scheme–because Fannie will say it has the note and/or produce the note.

    However, for the borrower to be required to make payments, there has to be a “Note Holder” to make those payments to. As we have seen, though, there is no “Note Holder,” a term which is explicitly defined in the note. And since there is no “Note Holder,” the “borrower” should as a matter of course be released from paying the obligation because the borrower is specifically obligated only to the Note Holder and no other party. If the Note Holder ceases to exist–not due to any fault of the borrower but rather due to the chicanery and greed of the securitizers–then that’s just the tough luck of the would-be Note Holder(s).

  5. From Naked Capitalism on why Obama hasn’t gone after fraud.

    Earlier this week, Matthew Yglesias defended the Administration’s distaste for pursuing fraud investigations against financial players:

    ….the Obama administration felt it was important to restabilize the global financial system. That meant, at the margin, shying away from anxiety-producing fraud prosecutions. And faced with a logistically difficult task, that kind of pressure at the margin seems to have made a huge difference. There simply was no appetite for the kind of intensive work that would have been necessary.

    I’m not as persuaded as, say, Jamie Galbraith is that the failure to do this is a key causal element in our economic problems. Indeed, I’d say that if you look at the situation literally, Tim Geithner’s judgment was probably correct.

  6. And why would an endorsement in blank ( or even
    to the trust) be warranted? The only reason I can think of is because *MERS and its buddies planned to use the dead notes to go after your home! First they skipped the notes altogether when foreclosing. Sneaked up on all of us, including the judiciary.

    Every nasty word I know here.

    Now, as we have made some legal in-roads, it’s gonna all be about the notes. Not. Okay, you blowhards, the note went into de trust (maybe and we’re gonna make you prove it for s’s and giggles), but it did not come out.

    *Who do you suppose penned these agreements?

  7. I just fund this on another blog and thought Id share..

    Cease & Desist Orders for:
    Citigroup, HSBC, JP Morgan Chase, MetLife, PNC, SunTrust,
    US Bancorp and Wells Fargo Bank

    By Daniel Edstrom
    DTC Systems, Inc.

    The latest round of Cease and Desist orders issued by the Office of the Comptroller of the Currency (OCC) are against some of the largest “too big to fail” banks. Notably missing so far is Deutsche Bank National Trust Company along with Deutsche Bank Trust Company Americas and of course OneWest Bank.

    The gist of these Cease and Desist orders is that certain “deficiencies” were found and the banks are operating with “unsafe or unsound” practices in residential mortgage servicing and in the Bank’s initiation and handling of foreclosure proceedings.

    We hail the OCC for these efforts, but the problem is following up. How are the banks going to immediately comply with this order? They would have to stop processing nearly every single foreclosure they are working on today.

  8. If that’s true, then these are not mortgage-backed securities. They are guarantee-backed securities?
    But, if that’s true, and payment streams are being maintained, then why are investors starting to sue over the bs ratings, etc?

    But do think about how MERS accomodated foreclosures…

  9. All right. I have on more than one occassion confessed my ignorance about securities, so don’t be too mean! I am wading thru a newer case wherein the judge made the best-reasoned determinations he could, I guess. ‘Course, I have issues, so I went out and beat up my trees and bushes for awhile to pontificate.
    I am trying to get this ‘stuff”, without having to get a masters in accounting or what-not. (Why don’t you just kill me?)
    The ‘stuff’ is somewhat addressed in this case, and got me thinking, (watch it!) but the case would not support the following:

    How’s this for a place to start:

    The note is nothing. The only reason it is even held for the trustee by the custodian of the trust/trustee is to bear witness to an event which has (already) occurred. Is this what is meant by the ‘trust’? The trust is that the trustee retains the notes as evidence of the debt purchased? The notes went into the spv, w/e.

    This evidenced the debt being bought by the investors. Securities were then bought by the
    investors, based on the note debt. They did not buy the notes. I don’t get the note plus my securities, right? If I could, sign me up. The notes only evidenced the debt purchased. The notes could have been destroyed. However, their ‘existence’ provides evidence of the debt the investors bought, but nothing else. Nada. The custodian only retains notes as proof of the debt the securities bought.
    The notes and the securities can not exist – as ‘enforceable paper’ – at the same time. The notes were the ‘reason’ for the securities.

    The notes, which are now only evidence of the debt purchased as securities, are not
    enforceable because they are dead, their only purpose to evidence what debt the securities
    bought.
    The master servicer or someone guaranteed the payment stream on the debt purchased as securities / derivatives. Ouch, baby.
    Blah, blah, blah. The UCC is not applicable because while it is relevant to notes, the notes, they be dead! Since the notes are dead, there is also no collateral.
    Okay, hit it!

    PS, from the case: “Another section of the Trust Agreement notes that the mortgage loans wil be assigned to the Indenture Trustee, pursant to the Indenture.” Assuming the judge or his law clerk can read, is this a play on the word “assigned”?

  10. Why would ANYONE want to do business with this facade of a “Bank”. I think they need to remove America from it’s “Trademark”. Maybe if a few people in every city carried a placard asking “Why Do You Do Business Here” in front of their locations, (Need a license?) Maybe some would be encouraged to take their business elsewhere. If this is going to put me at risk with their attys., please remove this; If not By ALL means…go for it.

  11. YOU GOTTA SEE THIS!!!!

    http://stopforeclosurefraud.com/2011/04/17/video-sen-levin-grills-g

  12. Louise regarding Assange the Dog that barks rarely bites.

  13. The Bigger they are The Harder they fall

    Yes Anonymous they disregarded the law of Diminishing return. That is like me going into an anti gravity chamber float for awhile and then jump off a 2000 ft cliff and expecting the same results.

    NEVER AGAIN

  14. Who is Moynihan kidding?? Problems go way back before Countrywide acquisition. The bank purchased mounds of subprime mortgages under other subsidiary (Depositor) names — way before Countrywide was formally acquired.

  15. More foreclosures look really pretty to Wall Street. BOA is just the chosen example.

  16. looks like my Deed of trust to longbeach mortgage from 04 was “bought back” according to “650 page Senate” report…no doubt for fraud, reps and warrentee…Sooo, then LBMC is absorbed by WAMU 06/07 then “stolen” by JPMC 08..JPMC will not submit creditor info to me via QWR…anybody having info regarding LBM loan trust 2004-5 and 2004-6 appear to be empty and certifiied in 8k to being not traded…. looks like Ive almost got Chase convinced that they have been in error as “servicer” charging me the wrong interest rate since 08..when the docs I signed, and that are publicly recorded are varyable libor (should be 6% something)..hopefully this will help with a recession\quite suit..all the good local talent wants retainer….We’re in NW Washington…

  17. 2 words
    APPRAISAL FRAUD AND SECURITIES FRAUD

  18. “BOA is headed down.” Wishful thinking.

    Congress will not let BOA, or any of the other big banks “go down”. The fraud will continue unfortunately.

  19. What? Are we supposed to feel sorry for BofA. They are a scum-sucking mega bank that engages in fraud, extortion, embezzlement, unjust enrichment, illegal foreclosure, tax evasion, money laundering, breaking & entering, equity stripping, theft, fraud on the court, notary fraud, forgery, etc. I can’t think of any more right at the moment. The US is going to have a helluva time getting back its credibility.

    BTW, what happened to Julian Assange? Looks like the powers that be have put him on the back page. What’s up with that? I was just hooking up BofA with Assange. We never did hear back from him about BofA. Burmese8@yahoo.com

  20. BoA’s 10k and 8k ought to make for fun reading right? If everyone would take their money out of BOA and Chase, they would feel it a little more. Why does JP morgan Chase get to keep the profits from the madoff scandal? That crazy and bet it helped its bottom line. Where is William Balck when you need him? He could explain it so every dummy in the USA could understand. This country needs an enima. Debi

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