Loan Buyback Saga Far From Over. Blame Cannot Be Localized

Of course news that Bank of America had settled GSE repurchase claims on loans written by Countrywide (for pennies on the dollar) brought out a chorus of back door bailout boo birds. But I must remind, the fun part isn't over yet!

Al Yoon and Tom Hals write on the mess that has yet to be cleaned up....

I called attention to a few specific comments because they highlighted the confusion that arises when private investors attempt to prove a blatant breach of reps and warrants against an originator. Clearly the deck is stacked against those who are looking for retribution. The same can be said about the GSEs in this situation, which may or may not shine some light on why they were so willing to resolve repurchase claims with BoA even if they only recovered pennies on the dollar (bad for tax payer but at least we got something out of it!)

Analysis: Bank of America's GSE deal leaves plenty unsettled

NEW YORK/WILMINGTON, Del (Reuters) – Bank of America Corp’s $3 billion settlement with Fannie Mae and Freddie Mac may have brought New Year cheer to the bank’s stockholders, but now comes the hard part: settling far larger and thornier claims made by private mortgage investors.

After Monday’s announcement, Bank of America still faces lawsuits stemming from $375 billion of mortgage-backed bonds.

Compared with the deal with government-backed Fannie Mae and Freddie Mac, those legal claims will be far more difficult and costly and the latest settlement does not change that, according to legal experts and lawyers representing investors.

“It’s much more difficult to settle,” Jack Williams, a professor at Georgia State University College of Law, said of the investor lawsuits. “It’s going to take a long time and it’s going to take a lot of information.”

Talcott Franklin, a Dallas-based lawyer representing asset managers, hedge funds and other investors who have stakes in at least $600 billion of residential mortgage bonds, said the deal might be encouraging because it shows a willingness to resolve claims.

However, he noted Bank of America was particularly eager to settle with the two government entities, which purchase nearly all home loans currently sold by mortgage originators. Investors, in contrast, do not have the same profitable relationship with the bank or its rivals, he said.

Bank of America’s stock jumped 5 percent on Monday as investors greeted the settlement as a sign the company would be able to contain demands that it buy back billions of dollars in soured home loans.

Those loans were packaged into bonds sold as top-rated investments, but their shoddy construction became apparent when the U.S. real estate market suffered its worst crash since the Great Depression.

Investors ranging from hedge fund managers to several Federal Home Loan Banks have sued Bank of America and its Wall Street rivals and most want the banks to buy back the securities or loans backing them.

Money manager BlackRock Inc and bond fund Pimco are in talks with Bank of America over $16.5 billion of mortgage bonds they purchased.

Legal experts said the investor litigation will be tougher to resolve in part because the claims stemming from the loans sold to Fannie and Freddie may have been easier to settle.

The government-sponsored enterprises often had higher standards and well-understood eligibility guidelines for the mortgages they purchased. As a result, the lower quality loans were shipped off to other investors.

Williams, who has been researching legal issues surrounding mortgage securities, said Monday’s deal may even wear down some of the resistance of bond trustees, who have been a hurdle to investor lawsuits.

That could lead to an increase in new complaints against the Wall Street banks, but he did not think Monday’s settlement would expand the range of investors considering a lawsuit.

Investors also have a bit of momentum on their side, thanks to some recent court rulings.

MBIA, a bond insurer, recently overcame objections by Bank of America to the use of sampling from loan portfolios to prove the bank breached promises about the quality of its mortgage underwriting.

Bank of America had wanted MBIA to prove its case on a loan-by-loan basis, an incredibly expensive task in a lawsuit covering more than 375,000 mortgages.

In addition, the Federal Home Loan Bank of Pittsburgh recently overcame a motion to dismiss its case against several banks, including JPMorgan Chase & Co

Bank of America stockholders probably should not expect a settlement with private investors any time soon.

“It’s going to take a long time, it’s going to take a lot of information” to settle investor claims, said Williams.

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Now is a good time to republish something we wrote in October...

Loan Buyback Requests Seldom Successful Without Blatant Fraud

Mid-size independent and community mortgage bankers have been fighting buyback demands from the big bank aggregators for the last two years. Remember we're not talking about new loans here, this is paper written several years ago when the housing bubble was nearing its breaking point, during the "subprime/alt-a/low doc/low credit/no credit/no doc/everybody gets a loan" era.

The most common justifications for buybacks today are the discovery that the borrower has debts that were not disclosed to the lender/investor, problems with appraisals, and overstated income. However in my experience, in most instances, buyback requests aren't ending favorably for the complaining party unless there was blatant fraud in the loan file (for example, claiming a property was the borrower's primary residence when it was not).

Counterparties, those having loans "put-back" on them,  have generally been able to avoid put-backs based on appraisals and overstated income with reasoning like "the labor market tanked" and  "housing prices plummeted". Plus many loan originators were smart enough to include language in their contracts about what could trigger a buyback and what couldn't. These contracts make it easier for originators to argue against buyback demands from above today, that is unless there was a blatant disregard for  underwriting guidelines or fraud in the file.  On top of that we cannot forget that these low doc loans were approved by automated underwriting engines or by one of the big bank aggregator's own underwriters (Fast and Easy/SISA product = perfect example). Oh and that dooesn't even include the originators that no longer exist. Ever visit ML Implode?

I shouldn't describe the counterparty process as "easy" though...buyback demands occupy a lot of time, they cannot be ignored and require specialized attention. From that perspective it will be interesting to see how  the big bank aggregators deal with larger buyback requests from private investors and the GSEs.

At this point, without some form of resolution authority, we'll be dealing with fallout from foreclosure processing and loan buyback demands for years and years to come. This does not bode well for a housing recovery or an uptick in "demand pull inflation".

I went into greater detail on the sloppiness of the origination to securitization process in THIS POST

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After reading that it should be clear that MBIA really lucked out being able to use a statistical sampling in their claim. Because BoA does have a case! Everybody involved in the home buying process played a role in reps and warrants breaches. Consumers, Realtors, Brokers, Bankers, Builders, Originators, Attorney, Appraisers, Accountants, Underwriters, Processors, Receptionists. EVERYBODY INVOLVED. The blame cannot be localized.   We might as well just put the entire housing industry on trial now and get the "burning at the stake" over with so we can begin earning back the trust and respect of consumers again...through education.