Posted on Thursday, October 21, 2010
The Federal Reserve Bank of New York has joined a group of investors demanding that Bank of America buy back billions of dollars worth of mortgage securities that are plagued with shoddy documentation and lending standards, according to people familiar with the matter.
Some of the most powerful investment groups in the country as well as the New York arm of the central bank are accusing one of Bank of America's major mortgage divisions of cutting corners when it was issuing mortgages during the housing boom and as it has been foreclosing on struggling borrowers during the bust.
If Bank of America refuses to comply, these investors could end up suing, a person familiar with the matter said.
The demand from the New York Fed and other investors sets up an unusual and high-stakes confrontation, pitting an arm of the federal government against the country's biggest bank. It also illustrates conflicting policy priorities, because it could put the Fed at odds with a bank the Treasury Department has been helping through the financial crisis over the past two years.
With this new confrontation, the government finds itself in the awkward position of being an unhappy private investor pressing for its rights to be enforced. The New York Fed holds roughly $16 billion of mortgage securities that it acquired after it bailed out American International Group.
On Tuesday, Bank of America dismissed concerns that investors will drag the bank into court for years with costly lawsuits.
"We don't see the issues that people [are] worried about, quite frankly," chief executive Brian Moynihan said in a conference call Tuesday as the bank reported a $7.3 billion third-quarter loss.
But against a backdrop of accusations that banks did not properly foreclosure on homes, a growing number of bondholders are ramping up attempts to recoup their losses from mortgage securities they bought from banks. These securities plummeted in value as home prices dropped and a massive wave of borrowers fell behind on their payments.
Attorneys for the group of investors say that affiliates of Countrywide Financial, which was bought by Bank of America in 2008, failed to service 115 pools of loans as promised after the investors bought a large swath of $47 billion worth of mortgage loans.
These investors, which also include Blackrock, Prudential, MetLife and Pimco, argue the banks have not kept accurate paperwork on the loans that were sold, a charge being investigated across the nation as details have emerged that banks may have taken shortcuts to save money and time. These concerns have prodded a handful of banks, including Bank of America, to temporarily halt foreclosure sales.
The big investment firms - which manage funds from endowments, pension funds and others - say they have also been upset that Treasury and the banks have been too quick to restructure mortgages, which hurts investors. Yet the department has left largely untouched consumer debt and home equity loans owed to the same big banks at the heart of the lending and foreclosure debacles, according to a senior executive at one of the investment companies.
Now that new document problems have emerged, one senior executive said, investors are able to allege that Countrywide didn't even own the mortgages it sold and was in violation of local real estate laws. As a result, he said, Bank of America is responsible for repurchasing the securities from investors.
Investors' fear, he said, was that "the politicians creating noise about mom and apple pie and the servicing industry will agree to all sorts of things to do right by the borrower, and the person who pays the ultimate cost is the investor."
Headlines about flawed foreclosures have added momentum for the small group of investors who have been threatening legal action for years against the banks. "We've signed up many new investors," said Tal Franklin, a lawyer.
Blackrock, Pimco and the New York Fed declined to comment. MetLife and Prudential did not return calls for comment.
On Tuesday, Bank of America said its quarterly loss was driven mainly by a $10.4 billion write-down in the value of its card services business as a result of new federal limits on debit card fees.
The company said it ended the third quarter facing $12.9 billion of claims that it should repurchase mortgages that it misrepresented.
Courts are hashing out the complex legal questions surrounding the way judges review foreclosures. On Tuesday, an emergency measure approved by Maryland's highest court empowered judges to bring in outside experts to review questionable papers.
"Nothing in this rule mandates any particular action by the court," said Alan Wilner, chairman of the Maryland Standing Committee on Rules of Practice and Procedure. "This flexibility is essential, because the context and circumstances may be different from case to case." Washington Post
Staff writers Brady Dennis and David S. Hilzenrath contributed to this report.