Funds Seek Countrywide, Bear Stearns Home Mortgage Buybacks $11.6 billion


Investors face an “obstacle course” of challenges in attempting to get banks to repurchase loans that failed to match their description in bond documents, Grais said

bondholders said they have the power to order the trustee for the securities to start probes because the investors own 25 percent of the debt in particular bond issues.


Obviously the REAL LENDERS are getting pissed off. So the ankle biting is starting and there is an even playing field — both sides have the money to fight it out. The REAL issue for the real lenders (investors) is that the middlemen (investment banks et al) refuse to cooperate in accounting for the loans that were supposedly in the loan portfolios which were REPRESENTED to be in the pool. As stated numerous times on these pages, they are finding that the loans are non-existent, never made it into the pool or that the loans described by the pool managers are mis-characterizations of the actual loans.

That’s our point for the borrowers too. The REAL (SINGLE TRANSACTION) DEAL here was between these lenders and the homeowners with numerous intermediaries in between creating layers of “exotic” (fraudulent) documents, spreadsheets, the result of which was that the “borrower” was the special purpose vehicle – SPV (i.e., the pool, the trust or whatever you choose to call it which incidentally was never actually created in accordance with law) PLUS the co-obligors and guarantors PLUS the servicers PLUS the homeowners. Grais doesn’t want to go after the homeowners because he wants all the obligors to be liable, not just the homeowner who received part of the funds borrowed from investors. THAT is why investors are not kicking aside the intermediaries and going directly after the foreclosures.

These lenders could fire the trustee and fire the servicer and put in their own people to settle these foreclosures on far more favorable terms for both the lenders (investors) and the borrowers (homeowners) than the current process of foreclosures. But if they did that they would be letting deep pockets off the hook for the rest of the lost money. These lenders are getting VERY close to the truth of the matter — not only were the loans misrepresented, not only were the underwriting standards non-existent, not only were the loans never actually transferred legally into a legally organized pool, but there are two huge black holes into which a substantial portion of their money was poured, never to be seen again.


The first black hole was the spread between the money received from the lenders for funding mortgage loans and the actual money used for that purpose. My estimate is that at least 30% of the money went off-shore into SIVs never to be seen again. That is the “Tier 2 Yield Spread Premium” I have been talking about which I believe both the homeowners and the investors have right to recover under different laws. How many investors would have parted with pension fund money if they were told “Thanks for the $100 million. We are going to take $30 million and put it in our pocket and then buy $30 million worth of mortgages, change their descriptions and sell them to you for $100 million when their nominal value is less than $70 million.” Somehow I think even the stupidest fund manager would have said “No” to that proposition, but that is exactly what they got.

The second black hole is the money received from insurance, guarantees and credit enhancements which was represented to be covering the investors’ money but in fact was payable to the intermediaries. It’s really simple. Taking the $30 million they never used to fund the mortgages described in the preceding paragraph, they took a portion of that money and made some wild bets — not like a stupid bet though, because they had total control over the outcome. It was like betting on a horse and then shooting all the others as the race begins. The Jockey could drag the horse over the finish line and still win. In the world of securitization, they created contracts in which the party receiving the insurance was the one who declared the loss and the loss could not be contested by the insurer. The terms of the contract were that if a certain percentage of the loans defaulted then the value of the entire portfolio would be written down to a level chosen by the insured — yes the party receiving the insurance money decides how much the claim is worth and the insurer can’t say a word. By loading the portfolio (pool) up with loans guaranteed to fail, where the payments would reset to twice the person’s income for example these intermediaries made a fortune on paper. But of course AIG and AMBAC couldn’t pay all that so the American Taxpayer did. So the investor took the loss, the intermediary took the money, took the hedge money that would have covered the loss, and is now in the process of taking the homes too.

Grais wants to recover that money and he will. The investors will be made whole or will settle the obligation. But despite these settlements, and despite the fact that in many cases the loan principal of a homeowner loan has been paid several times over the media and the government don’t see that the the reason the housing market is getting a hosing, the reason the taxpayer is getting a hosing and the reason the economy is getting a hosing along with the budgets of local, state and federal governments, is that the trillions paid by the American taxpayer and private companies actually went somewhere. And the homes were just pawns in the game. If you stop the foreclosures dead in their tracks right now, nobody would lose any money. All we want is a fair share of this money to be credited to the loan obligations — which automatically means a correction in the principal amount due and an opportunity to adjust the loan terms to the new reality of the real obligation due and real value of the property that was fraudulently appraised to begin with and fraudulently represented to the lenders and the homeowners.

The irony is that DISCOVERY is the least likely way of actually getting the information to prove the fraud but the most likely way of showing that the other side is uncooperative. The fact is that these “brilliant” intermediaries were so narrow in their perspective that they really don’t know the answers to the questions put to them in discovery, they don’t have the paperwork and they don’t know how to find it. The work being done on behalf of borrowers in the TITLE AND SECURITIZATION ANALYSES AND OTHER SERVICES here and elsewhere is what reveals essential facts that prove the fraud like: the Notice of Default when they were reporting to the investor that the loan was fully performing and actually paying the the investor thus decreasing the obligation due, or a foreclosure on behalf of a pool that had long since been dissolved unknown to either the homeowner or the investor.

Funds Seek Countrywide, Bear Stearns Home Mortgage Buybacks
By Jody Shenn – Sep 22, 2010 6:47 PM ET

Mortgage-bond trustees Bank of New York Mellon Corp., Bank of America Corp. and Wells Fargo & Co. should demand lenders buy back home loans underlying securities owned by two hedge funds, a lawyer for the investors said.

The funds sent separate requests to the three banks that serve as trustees for 14 securitizations at issue with $11.6 billion in outstanding debt, said David J. Grais, a partner in the law firm Grais & Ellsworth LLP. He declined to name the funds in a Sept. 20 interview at his New York offices.

An increasing number of investors are taking action after the worst housing recession since the 1930s sparked a record drop in the value of mortgage debt. Banks face as much as $51 billion in losses tied to loan repurchases from poorly performing securities, FBR Capital Markets Corp. analysts said in a Sept. 20 report.

“The loss of patience has taken longer than we expected,” said Grais, whose hedge-fund clients are using data from real estate researcher CoreLogic Inc. to press their cause with the trustees. Grais said he has “been endlessly surprised” that more investors haven’t moved faster to assert contract rights.

His hedge-fund clients are looking to recoup money on loans in bonds from issuers including Countrywide Financial Corp., now part of BofA, and a unit of Bear Stearns Co., which was bought by JPMorgan Chase & Co.

Grais also represents the Federal Home Loan Banks of San Francisco and Seattle and Charles Schwab Corp. in separate lawsuits against securities underwriters, as well as hedge funds Ellington Management Group LLC and Greenwich Financial Services LLC in suits involving the servicing of mortgages within bonds.

Can’t Sue Underwriters

The hedge funds he’s representing in the request sent about 45 days ago to bond trustees can’t sue the securities’ underwriters because the funds bought the mortgage bonds in the secondary market, Grais said.

Kevin Heine, a spokesman for Bank of New York Mellon, and Jerry Dubrowski, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.

Elise Wilkinson, a spokeswoman for San Francisco-based Wells Fargo, and Tom Kelly, a spokesman for JPMorgan in Chicago, also declined to comment.

Investors face an “obstacle course” of challenges in attempting to get banks to repurchase loans that failed to match their description in bond documents, Grais said. The funds he represents that are seeking buybacks used data from Santa Ana, California-based CoreLogic to show the quality of specific loans didn’t meet sellers’ contractual promises, Grais said.

Scraping Data

CoreLogic’s data is culled from bond reports, tax records, property-valuation models and credit services, Grais said. Typically, only bond trustees can review actual mortgage files, seek loan repurchases and file lawsuits if the demands aren’t met.

Earlier this month, Houston-based law firm Gibbs & Bruns LLP said its clients had demanded Bank of New York investigate mortgages backing $26 billion of Countrywide-issued bonds, a request the bank denied because it said it failed to meet multiple requirements.

Kathy Patrick, a partner at Gibbs & Bruns, said her unnamed clients are evaluating the response.

Who Has Power

In that case, bondholders said they have the power to order the trustee for the securities to start probes because the investors own 25 percent of the debt in particular bond issues.

Grais’s clients are relying on a different approach, in part because they don’t own 25 percent in all the cases they are pursuing, he said. Some contracts require not only that investors demanding trustee action own 25 percent of the overall deal, but rather 25 percent of each class of securities in a given issuance, he said.

So far Grais’s clients are relying on CoreLogic’s data, which he said costs about $5 per loan, to make the case for them. Gibbs & Bruns’ Sept. 3 statement didn’t mention offering such research to the bank.

CoreLogic’s information on 48 securitizations showed about 28 percent of properties were valued at least 5 percent more than they should have been, Grais said. About 21 percent inaccurately described consumers as planning to live in homes rather than rent or flip them, which can be determined in part through where borrowers’ tax and other bills get sent, he said.

While Grais said he’s having a “constructive dialogue” with Wells Fargo, he expects the push will end in court as trustees either balk at the requests or complete probes and demand repurchases that the mortgage lenders then dispute.

The next step may be to file so-called derivative lawsuits on behalf of bondholders, which Grais said is an untested approach that would rely partly on court precedent involving family trust cases.

To contact the reporter on this story: Jody Shenn in New York at

To contact the editor responsible for this story: Alan Goldstein at

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