Streaming Audio of Bloomberg Radio’s Hays Advantage Segment Featuring Isaac Gradman Now Available

Posted on January 4, 2011 by Isaac Gradman

On October 22, 2010, I appeared Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays to discuss issues facing RMBS investors in litigation against originators and underwriters.  A number of readers have asked me if a recording of the interview was available.  Below, please find links to that interview, split up into two segments.  Select “Open With” to hear them in your preferred media player.  Many thanks to Kathleen Hays and producer Kendall Kulper for inviting me onto the show and for providing me with these recordings.

Click here to play streaming audio of Segment 1 of Hays Advantage Bloomberg Radio spot featuring Isaac Gradman.
Click here to play streaming audio of Segment 2 of Hays Advantage Bloomberg Radio spot featuring Isaac Gradman.

Posted in Bloomberg Radio, foreclosure crisis, investors, lawsuits, media coverage, putbacks, rep and warranty, repurchase, RMBS | 1 Comment

MBIA Sampling Order Signals Shorter Path to RMBS Putbacks

Posted on December 30, 2010 by Isaac Gradman

The news gets worse for Bank of America.  Not only will it have to eat massive numbers of Countrywide-originated loans, but the bank may have to complete repurchases sooner than previously thought.  Judge Eileen Bransten’s long-awaited evidentiary ruling in the New York state court makes it clear – MBIA can use statistical sampling to prove its claims against Countrywide/BofA.  The ruling provides the bond insurer–and other insurers and private label investors–with a short cut to proving claims against lenders and originators of defective mortgage loans.

Bransten’s Order has already had an impact in newly-filed litigation over the losses associated with private label residential mortgage backed securities (RMBS).  A $700 million lawsuit filed by Allstate Inusurance Co. against Bank of America this past week refers directly to language from Bransten’s Order (available here and embedded below).

In her 15-page Order, Bransten found that MBIA will “be allowed to use and present evidence for its case through statistical sampling” (p. 15).  This means that MBIA will not have to present evidence of fraud or breach of contract for each of the 300,000-plus loans at issue in its case to a judge or jury; instead, MBIA will be able to evaluate a much smaller but statistically significant sample of loans and extrapolate the findings to the rest of the loans in the challenged securitizations.

In the course of making her ruling and rejecting the vigorous arguments made by Countrywide in opposition to MBIA’s motion, Judge Bransten found that the use of statistical sampling of large populations was not novel, was generally accepted in the scientific community, and was appropriate in the case at bar.  Bransten also explicitly held that her decision, “has the possibility of saving the parties and the court from significant litigation time and may significantly streamline the action without compromising either party from proving its case” (p. 13).

The outcome of MBIA’s evidentiary motion (also known as a motion in limine) was not entirely unexpected based on Judge Bransten’s prior comments.  In a June 16, 2010 hearing (transcript available here), Bransten said,

I think that it makes all the sense in the world that you can use a sample to prove the case because otherwise I can’t imagine a jury listening to 386 thousand cases.  Even if you have that available, nevertheless you are not going to present that to a jury or even a judge.  I’m patient but not that patient.  So, therefore it is going to be a sample in the end…

Yet the fact that an order in this regard has officially been put to paper–and in a closely-watched case such as this one–is already having a major impact in the MBS litigation world.  On Monday, Countrywide and Bank of America were sued by Allstate Insurance Co. and its affiliates over $700 million of RMBS purchased by the insurer (complaint available here).  In that suit, Allstate proposed to use samples of 1600 loans (800 defaulted loans and 800 randomly-sampled loans) from each of 14 securitizations (there are 61 securitizations at issue) to prove its claims.  In support of this methodology, Allstate asserted that,

Allstate‘s sample sizes of Mortgage Loans are more than sufficient to provide statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage Loan characteristics. Analyzing data for each Mortgage Loan in each Offering would have been cost-prohibitive and unnecessary. Statistical sampling is an accepted method of establishing reliable conclusions about broader data sets, and is routinely used by courts, government agencies, and private business. As the sample size increases, the reliability of its estimations of the total population increase as well. Experts in RMBS cases have found that a sample size of just 400 loans can provide statistically significant data, regardless the size of the actual loan pool, because it is unlikely that so large a sample would yield results vastly different from results for the entire population. (Allstate Complaint, p. 38)

Filed by Quinn Emanuel, the same law firm representing MBIA and other monolines, the Allstate Complaint is novel for its assertion of a “matching strategy” by Countrywide–that is, that Countrywide was willing to approve any mortgage feature offered by its competitors, resulting in Countrywide “mixing and matching the worst features of mortgage products from different competitors,” and creating a product that was “very aggressive within the industry” (Allstate Complaint, p. 2).  Such a strategy required Countrywide to systematically abandon its guidelines and resort to the widespread use of unsupported exceptions, according to the Complaint.

As the Allstate Complaint shows, Bransten’s decision in the MBIA case has already dealt a blow to banks trying to defend themselves against mortgage putback liability, as it significantly reduces the prospective litigation costs, as well as the projected timeline, for investors seeking to compel originators to buy back defective loans with the help of the courts.  However, the decision is particularly harmful for BofA’s financial outlook and the credibility of its executives.  In addition to shorting the path to court-mandated repurchases by the bank, which has the most potential putback liability of any of its peers based on its acquisitions of Countrywide and Merrill Lynch, the decision undermines several statements made by BofA’s CEO, Brian Moynihan, regarding his strategy for the battle over rep and warranty liability.  For example, during BofA’s 2010 Q3 earnings call, Moynihan stated that, “This really gets down to a loan-by-loan determination and we have, we believe, the resources to deploy against that kind of a review… we will go in and fight this.  It’s worked to our benefit to–we have thousands of people willing to stand and look at every one of these loans.”

Moynihan has also stated that BofA would approach this type of litigation like “hand-to-hand combat,” disputing individual putbacks and dragging out litigation as long as possible to allow the bank’s earnings to offset these contingent liabilities.  Bransten’s Order presents a significant roadblock to the execution of that strategy.  Now, instead of going loan-by-loan, MBIA will be able to use a surprisingly small sample–less than 1.6% of the total loan population in dispute–to prove incidences of breach or fraud in the entire pool.

In its motion in limine, MBIA proposed using a statistical sampling methodology that included sampling 400 loans from each of the 15 securitizations at issue; stratifying the samples into mutually exclusive subgroups based on the characteristics of the borrower’s credit score, combined loan to value ratio (CLTV) and Countrywide’s documentation program; and then dividing each of these subgroups into further subgroups to ensu
re that important loan characteristics were adequately represented in the samples.  The monoline also proposed using delinquency status to stratify the samples used to prove its servicing contract and implied covenant claims.  MBIA asserted that this methodology would provide a confidence level of approximately 95% with a 5% margin of error.  Though Bransten ruled that MBIA could use this methodology to present evidence at trial, she stopped short of rejecting Countrywide’s arguments that this methodology was flawed and subject to challenge, arguments that she conceded “are not without merit” (p. 11). Instead, she ruled that those challenges were “premature,” and that “Defendant’s cited issues will be decided by the trier of fact as pertaining to the weight, rather than the acceptability, of the evidence” (p. 12).

Bransten’s commentary signals that MBIA may not be out of the woods yet in proving its case against Countrywide.  As an initial matter, the sample size seems exceedingly small compared to the overall loan population.  Due diligence firms like Clayton, who were often hired by investment banks to perform due diligence checks on loan pools before the bank would buy them, often took a 10-20% sample to ensure adequacy.  As recounted above, Allstate has chosen a sample size of 1600 loans–four times the sample size chosen by MBIA. With the cost of hiring a third party firm to review a loan file averaging around $300-350, meaning that it would cost MBIA over $5 million more to review a sample of 1,600 loans across its 15 securitizations, it’s easy to see why MBIA is trying to keep its sample size small.  Still, while I’m no statistician, it seems like cutting corners in this way could open MBIA’s data up to a number of technical challenges.

Furthermore, it’s not at all clear how the representative sample would be applied to the overall loan population, even if it was established to be representative by the trier of fact.  The contractual remedy for proving that Countrywide breached a rep and warranty with respect to a loan is the repurchase of that particular loan.  How would that remedy be applied to the overall loan population if MBIA’s sample showed, for example, that 60% of loans breached at least one rep and warranty?  In other words, which loans would Countrywide be forced to repurchase, and how would the court ensure that size and the loss severity of those loans lined up with those found to be defective in the sample?

Still, this decision is a definitive win for MBIA and all RMBS investors hoping to recoup some portion of their losses.  Now that MBIA has received the loan files underlying the securities at issue, it’s only a matter of time before it will be able to find significant percentages of loans with (often multiple) material deficiencies.  By enabling the insurer to project findings on such a small sample to the rest of the pool, this decision provides MBIA with a monumental shortcut to establishing Countrywide’s repurchase liability.  Only time will tell if this changes BofA’s strategy of hand-to-hand combat and brings the bank to the negotiating table, or simply provides the bank with one more issue on which to put up a fight.

[Thank you, as always, to Manal Mehta for sharing his perspective and real time updates on this case – IMG]
Bransten Sampling Order (MBIA v. Countrywide) http://d1.scribdassets.com/ScribdViewer.swf?document_id=46008294&access_key=key-2bvsg4dsfur86xdm5ujv&page=1&viewMode=list

Posted in Allstate, BofA, bondholder actions, Countrywide, due diligence firms, investors, litigation costs, MBIA, monoline actions, quinn emanuel, rep and warranty, repurchase, RMBS, statistical sampling | 5 Comments

Federal Home Loan Bank of Pittsburgh Scores Important Early Victory in Pennsylvania Lawsuit

Posted on December 7, 2010 by Isaac Gradman

In the first substantive decision handed down in any of the five major lawsuits by the Federal Home Loan Banks (FHLB) over RMBS losses, the Hon. Stanton Wettick, Jr. of the Court of Common Pleas of Allegheny County, Pennsylvania dealt a blow to JPMorgan Chase, Countrywide and other securitizers of subprime and Alt-A mortgage loans, while letting the ratings agencies largely off the hook.  In the Order on Defendant’s Motion to Dismiss (full copy available here), Judge Wettick found that the FHLB’s claims for fraud, negligent misrepresentation and Securities Act violations could proceed against J.P. Morgan Securities, Inc., the entity that actually offered the mortgage backed securities for sale to investors and put together the securities’ offering documents.

The crux of the FHLB’s claims are that the securitizers (also known as depositors or sellers and sponsors) of various MBS offerings it purchased allowed those securities to be sold as AAA-rated or investment grade debt (which, according to the FHLB, indicated that they were virtually riskless), despite the fact that these securitizers knew that the ratings agencies had no way of determining the likely default rate of the underlying loans. Though the Court dismissed these claims as to the other JPMorgan entities that had acquired and transferred the loans earlier in the securitization chain, the Order was definitely a win for the FHLB because it confirmed that at least one investment bank entity would be on the hook for the sale of these toxic securities.

Meanwhile, the various ratings agency defendants were pleased with Judge Wettick’s Order, as it dismissed all claims against them except the claims of fraudulent (also known as intentional) misrepresentation.  The Judge ruled that the plaintiff had stated a claim for fraud based on the theory that the ratings agencies did not actually believe their own ratings (note that considerable evidence has recently emerged to support this argument, in particular, the findings of the Financial Crisis Inquiry Commission that the ratings agencies ignored evidence that these loans were unsound, as testified by former Clayton president D. Keith Johnson).  The Court further held that while the First Amendment protected the ratings agencies from liability for negligent misrepresentation, it did not protect the agencies from claims of fraud.  The Court further dismissed the Securities Act claim against the ratings agencies based on Section 11 of the Act, finding that the defendants were not “underwriters” subject to the statute, as defined therein.

Judge Wettick’s Order is an important early bellwether in investor litigation over losses from RMBS, because it shows that plaintiffs should be able to survive a motion to dismiss and get into the discovery phase without having a ton of hard evidence.  Indeed, as the first of the FHLBs to file suit (Pittsburgh’s suit was followed by the FHLBs of Seattle, San Francisco, Chicago and, most recently, Indianapolis), plaintiff’s counsel had not yet developed or taken advantage of the analytical tools used later in the Seattle and San Francisco complaints to show that specific representations made in the offering documents were false (see prior post on the Subprime Shakeout).  As we are still very early in the timeline of investor RMBS litigation, and do not have much precedent for how judges will treat these types of loss-related claims, this opinion bodes well, not only for the FHLB lawsuits, but for other impending investor actions.

Without access to loan files, plaintiffs are often caught in a tough position of having to make claims that the loans did not meet guidelines or representations without having the evidence to support such claims.  While the massive losses related to these products indicate investors were sold a defective bill of goods, servicers have largely refused to turn over documents that might confirm or disprove these claims.  Indeed, that is what the discovery process is intended to do, but there has long been speculation as to whether plaintiffs had enough to go on to surmount a motion to dismiss.  This Order reinforces my belief that the massive RMBS losses suffered by plaintiffs are enough to overcome this initial hurdle, meaning that plaintiffs will eventually get access to these treasure troves of misrepresentation fodder when banks are forced to turn over loan files in discovery.  And this decision bodes especially well for the later-filed FHLB complaints, which cite stronger evidence of widespread breaches of reps and warranties, thanks to the analysis provided by due diligence firm, CoreLogic.

Another interesting aspect to note about this case is the Judge’s handling of defendants’ “sole remedy” argument.  Namely, JPMorgan and the other defendants have argued, as have other banks in RMBS litigation, that plaintiffs may not assert claims for fraud, negligent misrepresentation, or other torts, because the language in the Pooling and Servicing Agreements (“PSA”) makes clear that the repurchase or replacement of a defective loan is the sole remedy for a breach of originators’ or underwriters’ reps and warranties.  Judge Wittick dismissed this argument, finding that the repurchase remedy was only available to the Trustee, and not to investors, so this could provision could not have been intended to apply to bondholders.  Though I have not reviewed these particular PSAs in detail, I would be surprised if they did not provide that investors could petition the trustee for such relief, should they amass a sufficient percentage of Voting Rights (generally 25%).

While I have often discussed the procedural hurdles investors face in taking advantage of this remedy, it is simply not the case that the repurchase re
medy is entirely unavailable to investors.  Thus, Wettick reached the proper conclusion, but for the wrong reasons.  I think the better-reasoned approach is to find that while repurchases are the sole remedy for contractual breaches of reps and warranties, the claims being made by the FHLB of Pittsburgh do not seek damages for breaches of reps and warranties in the underlying loans–they seek damages for material misrepresentations in the offering memoranda related to the ratings of the securities.  While breaches of reps and warranties may be related to the reasons the securities underperformed their ratings, I think that what the securitizers knew about the ratings when they made these representations is an entirely different question, only tangentially related to breaches of reps and warranties.  In fact, the securitizers could have been entirely unaware that there were breaches of reps and warranties, but still could have known that ratings agencies were not capable of estimating the risk of loss in these securities, and thus should have included disclaimers in the offering documents.  Simply put, relief for misrepresentation in prospectus and other offering documents should not be limited by the “sole remedy” language applicable to breaches of reps and warranties made by the originators of these mortgages in separate contracts.

Update on Other FHLB Actions
Several readers have requested updates on the actions brought by the FHLBs of Seattle and San Francisco.  The going has been slow in those cases (they are months behind the Pittsburgh case, which just now passed the motion to dismiss phase), but here is what I’m able to tell you: both cases were removed from state court to federal court by the defendants, in an attempt to obtain federal court jurisdiction over the plaintiffs’ claims.  So far, most of the action in these cases has been related to adjudicating the removal issue.  The way this works is that the cases are automatically moved to federal court upon the filing of a procedurally proper notice by a defendant. The plaintiff(s) may then file what’s called a Motion to Remand, arguing that the federal courts do not have jurisdiction over the claims and that the case should be remanded to state court.

The FHLBs filed Motions to Remand in both cases.  The Motion was granted in the Seattle case in September, Case No. 2:10-CV-00148-RSM, and the case was remanded back to Kings County Superior Court.  The San Francisco case is still before Judge Conti in the Northern District of California, Case No. 3:10-CV-03039-SC. The judge has taken the Plaintiff’s Motion for Remand under submission, and all other dates have been postponed pending the outcome of that decision.  Note that the Pittsburgh case discussed above is proceeding in Pennsylvania state court, rather than federal court.  I’ll keep readers apprised of any developments in these cases, as I become aware of them.

Posted in Countrywide, Federal Home Loan Banks, investors, JPMorgan, lawsuits, loan files, misrespresentation, ratings agencies, remand, removability, rep and warranty, repurchase, sole remedy, toxic assets | 8 Comments

Barron’s Article Pulls No Punches in Assessing Bank Putback Liability

Posted on November 22, 2010 by Isaac Gradman

If you’re looking for a great primer on the latest developments in the legal saga over who will ultimately bear the losses for the detritus that passed as subprime and Alt-A mortgage loans from 2004 to 2007, check out this article published by Jonathan Laing at Barron’s over the weekend.  In the article, entitled “Banks Face Another Mortgage Crisis,” Laing does a great job of bringing the casual observer up to speed on the various efforts by investors and insurers to force originating and securitizing banks to buy back souring mortgage loans that are found to breach the guarantees made when the loans were first originated and sold.

Among the highlights: the article frankly admits that with $2 trillion in subprime, Alt-A and adjustable rate mortgages having been originated during the last years of the housing boom, the losses on these loans could reach approximately $700 billion.  Laing also accurately assesses that the biggest battles the banks will face will come from investors in private label (i.e. non-agency backed) securities, and that banks may seek another government bailout to help ease the significant pain these private label putbacks may cause.  Laing also does not mince words about whether the banks deserve to be on the hook for these mortgages.  My favorite passage:

Certainly, some of the major banks amply deserve to suffer additional putback losses. By almost any measure, they were either negligent or willfully culpable in issuing securities with such glaring defects on the global investment markets. They had little incentive to worry much about investment quality, since the securitized loans passed off their balance sheets, ladling all the credit risks onto the credulous buyers.

The banks had created such a fee-rich securities sausage factory during the middle of the current decade that the ingredients going into their products were of little concern. It was merely important to keep production levels elevated even after the pool of creditworthy mortgage borrowers had run dry, only to be replaced by dead-beat subprime borrowers and alt-A mortgage-financed home speculators ready to mail their home keys to their lenders at the first whiff of home-price weakness.

Bankers argue that economic woes rather than shoddy loan underwriting are to blame for most of the lamentable financial performance of the mortgage market. Therefore, the pugnacious CEO of Bank of America, Brian Moynihan, has promised that the bank will engage in “hand-to-hand” combat to fight putback claims. “People who come back and say, ‘I bought a Chevy Vega, but I wanted it to be a Mercedes with a 12-cylinder [engine].’ We’re not putting up with that,” he insisted during a recent conference call.

Yet there’s plenty of evidence that the banks during that key three-year period in the middle of the decade passed off some Yugos as sleek sedans.

Laing also does a great job of pulling some of the juiciest pieces of evidence into his article that suggest that the banks were more than just sloppy–they may have knowingly duped investors regarding the quality of the loans they were selling.  Particularly damning is the testimony provided by the former president of Clayton Holdings, D. Keith Johnson, regarding the due diligence firm’s findings and the fact that they were often ignored by the securitizing banks, who “waived” deficient loans into securitizations.

But, I must disagree with a few of the points made in this article.  First, Laird refers to the legal principles under which investors will likely proceed to remedy defective mortgages–i.e., the representations and warranties found in the trust agreements–as “arcane.”  This wording implies that the legal principles are esoteric or overly complicated, and that investors’ reliance on them to putback loans seeks to take advantage of an obscure technicality.  Quite to the contrary, though Pooling and Servicing Agreements (PSAs) were often overly complicated, the reps and warranties provided by lenders were the key contractual guarantees that investors received when agreeing to purchase securities backed by the loans at issue.  These guarantees provided investors with the comfort that, though they lacked the capacity to review every loan to make sure it met certain quality thresholds, they could rely on lenders’ statements regarding the loans, and could rest assured that lenders would take back any loans that didn’t comply.  Thus, rather than “arcane” legal principles, reps and warranties are fundamental building blocks of any securitization, and the investors have every right to hold banks to their collective word.

Second, Laing describes the content of these reps and warranties as “at best, vague.”  I have to respectfully disagree.  The reps and warranties provided by subprime and Alt-A lenders were often extensive, and commonly included a representation that the lender would follow its published underwriting guidelines.  And even though these were “non-conforming” loans, and thus had more lenient underwriting standards than those for agency-backed or “conforming” loans, they were still underwritten with concrete guidelines about what characteristics they had to possess and the procedure that had to be followed by the lender when determining whether the borrower qualified for a loan.

A commonly misunderstood aspect of these loans is that many were so-called “stated income loans,” that is, the borrower did not need to provide proof of income, but simply stated it on the loan application.  Many take this to mean that the lender had no responsibility to confirm the accuracy of this statement, and instead could take at face value whatever the borrower claimed to make as income.  Yet, originators of stated income loans generally included in their published guidelines that they would confirm that the borrower’s stated income was reasonable and in line with the borrower’s occupation and years of experience.  Originators had extensive databases they were supposed to use to perform this review function.  When going back and reviewing a loan file after the fact, it is relatively easy to determine whether the originator followed this procedural step.  If it did not, it’s a clear breach of the underwriter’s guidelines, regardless of whether the borrower’s stated income turned out to be true or false.  It has long been my view here at The Subprime Shakeout that once loan files are turned over to investors, it will not be difficult to prove that there were widespread breaches of lenders’ underwriting guidelines and procedures.

Finally, Laing takes it as a given that banks will be on their own this time, i.e., that the federal government will have no appetite to provide the banks with any financial assistance to ease the pain of this latest mortgage crisis.  I am not so sure that this can be assumed.  Instead, I think regulators are eager to avoid another financial panic like the one that was touched off by the failure of Lehman Brothers.  Should one of the Big Four banks become dangerously undercapitalized upon the crystallization of putback liability, I’m afraid that the government will be asked (and be under intense political pressure) to step in once again.  I don’t necessary agree with this approach, but given what we’ve seen over the last two years, it certainly can’t be ruled out.

All told, though I take issue with some of the finer points contained within this article, I commend Mr. Laird on this fine piece of journalism and encourage readers looking for a concise and intelligible summary of banks’ potential subprime mortgage liabilities to check it out.

Thanks to Manal Mehta at Branch Hill Capital for first alerting me to this story – IMG.

Posted in allocation of loss, Barron's, Clayton Holdings, Lehman Brothers, loan files, private label MBS, rep and warranty, repurchase, responsibility, stated income, too big to fail, underwriting practices | 2 Comments

Bank of America Fires Off Response to BlackRock and PIMCO Demand Letter, Accuses Lawyer of "Ulterior Agenda"

Posted on November 9, 2010 by Isaac Gradman

In a response that can only be described as indignant, Bank of America fired back on November 4 at the group of investors that demanded that Countrywide/BofA repurchase loans in connection with $47 billion worth of private-label mortgage backed securities.  In the strongly-worded letter, a full copy of which is embedded below, BofA attorneys Theodore Mirvis of Wachtell, Lipton, Rosen & Katz; Brian Pastuszenski of Goodwin Procter and Marc Dworsky of Munger, Tolles & Olson railed against the allegations contained in the October 18 letter authored by attorney Kathy Patrick of Gibbs & Bruns, stating that Patrick’s letter contained “misleading statements,” alleged claims that were “utterly baseless,” and appeared to have been “written for an improper purpose, or in furtherance of a [sic] ulterior agenda.”

Much has made of Patrick’s October 18 letter, which was signed by such major institutional investors as BlackRock, PIMCO, MetLife, the New York Fed and Freddie Mac, making it the the most high-profile investor repurchase demand to date as to non-conforming mortgages.  In fact, BAC’s stock slid nearly 5% when news of the letter first emerged.

Yet, as I noted when I first posted about this letter and when I posted a copy of the letter a few days later, this first high-profile investor putback effort featured some serious deficiencies that might prevent it from succeeding – namely, that it failed to identify specific breaches of reps and warranties with respect to specific loan files or provide any evidence supporting those specific breaches.  Indeed, this turns out to be the very first point BofA’s attorneys make in responding to the letter.  In pointing out some of the “glaringly evident” deficiencies in the letter, BofA’s attorneys state:

Your letter fails to set forth a single fact in support of any of your allegations, but rather relies solely on conclusory and often misleading statements. (emphasis in original)

The BofA letter goes on to demand that the investors provide “sufficient factual basis for their allegations” and “identify the specific provisions of the specific PSA that is alleged to have been breached.”  Pursuant to the procedural roadmap from Judge Kapnick’s opinion dismissing the plaintiffs’ case in Greenwich Financial v. Countrywide, I would agree that Kathy Patrick’s investors will have to make this showing to survive a motion to dismiss for lack of standing if they eventually file suit against BofA/Countrywide.

However, the BofA letter also makes a number of points that are far less grounded in fact and appear designed to place political pressure on investors hoping to recover a portion of their MBS losses.  For example, BofA characterizes Patrick’s letter as demanding that Countrywide hasten foreclosures and reduce loan modifications.  The letter even accuses Freddie Mac’s involvement with Patrick’s group as “patently inconsistent” with the GSEs and federal government’s stated goal of helping troubled borrowers stay in their homes.  While this has historically been a hot button political subject, BofA’s statements are not an accurate representation of what the investors are seeking.

In fact, the Patrick letter specifically states that investors “do not seek to halt bona fide modifications of troubled loans for borrowers who need them.”  Instead, investors take issue with the Countrywide settlement with state Attorneys General in which, in exchange for the AGs dropping claims of predatory lending against Countrywide, Countrywide agreed to modify 400,000 loans, the large majority of which it no longer held on its books.  Patrick’s group seeks simply to hold Countrywide to its contractual agreement to repurchase loans that it modifies as a cure for predatory lending.

Similarly, Patrick’s letter does not demand that Countrywide force borrowers out of their homes.  To the contrary, the investors are simply demanding compliance with the Countrywide pooling and servicing agreement provision (Section 3.11(a)) that states that the Master Servicer must,

use reasonable efforts to foreclose upon or otherwise comparably convert the ownership of properties securing such of the Mortgage Loans as come into and continue in default and as to which no satisfactory arrangements can be made for collection of delinquent payments. (emphasis mine)

In other words, Patrick’s letter simply asks that Countrywide modify where it is reasonable to do so (and where it is not a remedy for Countrywide’s own predatory lending) and foreclose promptly where it is apparent that no satisfactory modification is to be had.  Patrick’s letter is thus better characterized as a demand that Countrywide perform its fundamental role as servicer, rather than as a heartless demand that Countrywide start kicking people out of their homes.

Finally, BofA’s letter sets forth a plethora of additional information from investors that it demands be provided prior to Countrywide taking any action.  Included in this is a demand that Patrick provide, for each bondholder who signed onto the letter, the names of the individuals who authorized that signature, whether the bondholder’s board of directors authorized that letter, and whether any of the bondholder’s controlling shareholders authorized the letter.  I’m not sure from where BofA derives the authority to demand this information, but it clearly suggests that BofA is not convinced that the internal management within each of the signing entities was unanimous in support of the Patrick letter.  BofA may also be trying to dissuade others from authorizing similar letters in the future for fear of their names being publicly revealed, something that institutional investors and their managers have thus far been reluctant to do.

Ultimately, though the BofA letter contains a lot of bark, the only bite that I can discern is the demand for more specific information.  Everything else is, well, politics as usual.

BofA Response Letter to Patrick Group http://d1.scribdassets.com/ScribdViewer.swf?document_id=41592157&access_key=key-13u1yigrl82ah6i4l1rm&page=1&viewMode=list

Posted in Attorneys General, BlackRock, BofA, Countrywide, Event of Default, Federal Reserve, Freddie Mac, Kathy Patrick, MBS, PIMCO, procedural hurdles, rep and warranty, repurchase, servicers, specificity | Leave a comment