Tuesday, October 19, 2010
The New York Times reports this morning that Bank of America, which services a huge proportion of the home mortgages in the United States, is resuming foreclosures after having found no erroneous actions in a comprehensive review.
Bank of America announced on Monday that it would resume home foreclosures in nearly two dozen states, despite the running controversy over how banks handled tens of thousands of cases of homeowners facing eviction.
Bank of America, the nation’s largest bank and the servicer of roughly one in five American mortgages, insisted that it had not found a single example where a foreclosure proceeding was brought in error.
The move is also likely to encourage other giant lenders, like JPMorgan Chase, to resume the foreclosure process that threatens two million homeowners.
Meanwhile, GMAC Mortgage, whose procedures helped prompt the controversy when one its executives testified that he had signed 10,000 documents in a month, is also proceeding with foreclosures.
Barry Ritholtz is skeptical, but then, he's always skeptical.
Why is it no surprise that the management failures began with GMAC, formerly the financing arm of General Motors? The generational incompetence of that organization seems to have gone beyond the design and manufacture of automobiles.
You've heard of the Big Short ... now comes the Big Put.
A lot of parties have claims that Big Banks should "take back" securitized mortgages because they didn't meet reps and warranties. Three of the Federal Home Loan Banks have already brought such suits. Now institutional investors are banding together to do the same. This is from today's WSJ:
"In a letter Monday, a group of institutional bond investors raised objections to the handling of 115 bond deals issued by affiliates of Countrywide Financial Corp., acquired by Bank of America Corp. in 2008. The investor actions, which seek to have certain loans be repurchased among other things, come as Bank of America on Monday took steps to defuse claims that its foreclosure troubles are deep-seated. The bank on Monday said it was restarting the foreclosure of more than 100,000 homes. ... The institutional investors, who include mutual-fund managers, government-related entities, insurance companies and investment partnerships, are seeking to have loans that didn't meet underwriting requirements repurchased and to be compensated for losses due to inadequate mortgage servicing ... ."
Fannie and Freddie can make similar claims against the Big Banks -- whether they do or not is a political question. If they do it'll be for 14 or 15 figures ... something like that ... I'm losing track ... "What comes after a trillion ....?"
Meanwhile, plaintiff lawyers have pending securities law claims over flawed mortgage securitizations, mostly over the prospectus disclosure not matching actual underwriting practice. These suits have largely survived early dismissal.
There's yet another problem ... potentially the biggest of all ... how securitized mortgages got transferred from the Originator to the Sponsor to the Depositor to the Trust. This is what's behind "robo-signing." False affidavits are just a symptom of a much bigger problem: securitization practice got so sloppy that perfected security interests in the property may have been lost, hence the need for backdated paperwork attested to by the kid in the mail room. Else the mortgage is ineffective .... there's still an IOU ... but it may only be an unsecured debt. A clever borrower in say Florida can declare bankruptcy and keep the house as a homestead exemption.
There's even a possibility that mortgages never really got put into the trust properly. If true, the trust is no longer a REMIC and thus no longer entitled to pass-through tax status ... double taxation on MBS cash flows, if you have any.
All this is on top of the bad economics in the underlying mortgages.
We'll need a "deux ex machina" to descend from the heavens to sort this all out. Right now, all we've got is Obama.