Countrywide Loan Modification Settlement Becomes Issue In Connecticut Senatorial Race

Posted on November 2, 2010 by Isaac Gradman

The ramifications of the Mortgage Crisis are being felt on this Election Day 2010, as the issues of foreclosures, loan modifications and MBS-related losses to pensionholders’ portfolios are being brought to the forefront in some key political battles.  As a prime example, take the heated race for Chris Dodd’s open Senate seat in Connecticut, where Democratic candidate Richard Blumenthal still held a single-digit lead over Republican candidate Linda McMahon in polls leading up to today’s vote.

Embedded below is a television spot by McMahon, entitled “The Biggest Lie,” which attacks Blumenthal’s participation in the settlement between Attorneys General from 44 states and Countrywide over the lender’s alleged predatory lending practices.  The ad suggests that while Blumenthal has stated that taxpayers would not pay a dime for the settlement, taxpayers would end up footing the entire bill for the loan modifications Countrywide agreed to perform.  The ad quotes an article by Alex Ulam called “The Bank of America Mortgage Settlement Fiasco” in the left-leaning publication, The Nation.

To be fair, taxpayers will not be footing the entire bill for the Countrywide settlement, as Countrywide/BofA still owns some of the loans at issue (the article in The Nation reports that the number is a paltry 12%), and The Nation article itself states that, “as it turned out later, much of the settlement’s cost would be covered by taxpayers…” (emphasis mine).  Thus, McMahon’s ad is not entirely forthright, either.  Furthermore, it’s unclear that Blumenthal fully understood the way the settlement would play out (see prior post), and The Nation suggests that Blumenthal “seems to have missed it entirely,” so calling his statement a “lie” smacks of political rhetoric.  But, the point is still a good one – the Countrywide settlement shifted the majority of losses to taxpayers and largely let Countrywide and BofA off the hook for its irresponsible lending practices.

I had a chance to meet with Alex Ulam, the author of “The Bank of America Mortgage Settlement Fiasco,” a number of times in San Francisco when he was first beginning his research for this story and was relatively new to the issues surrounding securitizations and loan servicing, such as servicer conflicts of interest and loan repurchase liability.  He came to me for some background on the Countrywide settlement (note that BofA spokesman Terry Francisco is quoted in the article as calling it an “agreement,” not a “settlement”) and an explanation of who would bear the costs of the agreed-upon modifications.  By the time Ulam’s article was published some months later, he evinced a firm grasp of the issues, and wrote a thorough and scathing piece for The Nation regarding the shortcomings of the resolution between the Attorneys General and the country’s largest subprime lender.
To be certain, this issue has been discussed previously in The Supbrime Shakeout (articles here, here and here) and in this article in the Daily Journal and California Lawyer Magazine.  However, Ulam’s article was one of the first in a nationwide publication to understand and explain to its readers that by agreeing to modify loans that it no longer owned, Countrywide was shifting the losses associated with its troubled loans to the pension funds, hedge funds, insurance funds and other investors who had purchased MBS backed by these loans.  And the article has made its impact, prompting McMahon to raise the issue as an attack on Blumenthal, and garnering a good deal of local media coverage in Connecticut, such as this article in the Greenwich Times/Stamford Advocate.
It remains to be seen whether the allocation of losses relating to the Mortgage Crisis will be a major factor in this year’s elections, but it is clear that these issues are beginning to seep into the mainstream consciousness.  I would imagine that politicians all over the country are watching the Connecticut senatorial election closely to see whether voters care enough about these issues to make them pay at the polls for their role in the crisis or their failure to effectively clean it up.

Posted in allocation of loss, Attorneys General, BofA, Christopher Dodd (D-CT), Countrywide, global settlement, Linda McMahon, loan modifications, political ads, Richard Blumenthal, senate races, The Nation | 2 Comments

Full Text of BlackRock, PIMCO Letter to Bank of New York and Bank of America Available

Posted on October 21, 2010 by Isaac Gradman

Below, please find the full text of the letter sent by Kathy Patrick and the law firm of Gibbs & Bruns to Bank of New York and BofA/Countrywide on behalf of private label mortgage investors, including BlackRock, PIMCO, MetLife, Freddie Mac and the New York Fed.  This letter represents one of the first formal attempts by a group of bondholders to issue binding instructions to a Trustee to take action on their behalf.

As you read through, keep in mind that the bondholders must identify a specific breach or event of default in order to meet the procedural preconditions to Trustee action and gain standing to sue if the Trustee does not act within 60 day (see recent article on procedural preconditions to bondholder standing).  See if you think Patrick’s allegations regarding Countrywide’s knowledge of breaches of underwriting reps and warranties, based on its modification of loans and its lawsuits with bond insurers, or her allegations regarding Countrywide’s improper maintenance of loan documents, overcharging for maintenance services or failure to notify the Trustee of defects in the loans constitute the specific evidence of breaches necessary to meet her procedural requirements.  Given that she does not identify a single loan by loan number or provide any specific evidence supporting any of her allegations (the closest she comes is citing a press release issued by the FTC), I remain skeptical.

[Many thanks to the folks at Branch Hill Capital for providing me with a copy of this letter – IMG.]
Bondholder Letter to BofNY and BofA Over Countrywide Loans http://d1.scribdassets.com/ScribdViewer.swf?document_id=39838424&access_key=key-9ff9j4kbi9sxm0s3l2u&page=1&viewMode=list

Posted in Bank of New York, BlackRock, BofA, bondholder actions, Countrywide, Federal Reserve, Freddie Mac, Kathy Patrick, loan modifications, MetLife, PIMCO, private label MBS, procedural hurdles | 6 Comments

PIMCO, BlackRock, New York Fed To Demand That BofA Repuchase Faulty Non-Agency Mortgages

Posted on October 19, 2010 by Isaac Gradman

Private label residential mortgage backed securities (RMBS) investors, including BlackRock, PIMCO, and the New York Fed, are expected to join MetLife, Inc. in its efforts to force BofA to repurchase defective subprime and Alt-A mortgage loans originated by Countrywide and backing the group’s investments, Bloomberg reports.  The group, led by Houston lawyer Kathy Patrick (see bio and promotional video here) and the law firm of Gibbs & Bruns, has stated in a letter to Bank of America and Bank of New York, the trustee in these securitizations, that it wants to be compensated for losses relating to inadequate servicing on certain loans and to have loans that failed to meet contractual reps and warranties repurchased by the originator.  The group holds approximately 25% of the voting rights in $47 billion of Countrywide RMBS in approximately 115 separately identified deals, according to a press release issued by the firm.  The Wall Street Journal reports that the group’s holdings total $16.5 billion.

By the close of trading today, BAC’s stock had slid to 11.80 (-4.38%) based on this news and the release of the company’s third quarter earnings report, in which it stated that it could not determine the potential size of its losses from private label putbacks and mortgage and bond insurer rescissions. Still, BofA CEO Brian Moynihan vowed to “defend our shareholders” by disputed demands that it repurchase non-agency mortgages.

While Kathy Patrick’s group is much smaller than the Investor Syndicate represented by Talcott Franklin (which is reported to have amassed over $500 billion of RMBS), Patrick’s group has done what the Syndicate has not yet been able to do – convince its members to move forward with concerted action demanding that the trustee and the originator of the loans backing its investments take action.  According to Patrick, ““We now are in a position where we have to start a clock ticking.”

What Patrick is referring to is that her October 18 letter, termed a “Notice of Non-Performance,” is expected to trigger a 60-day waiting period within which both the originator and trustee must act to remedy the breaches identified by the group.  While Countrywide/BofA will likely be asked to shoulder the financial responsibility for these alleged breaches, the letter urges Bank of New York, as trustee, to enforce Countrywide’s servicing obligations including the obligation to maintain accurate loan records, demand repurchase of loans failing to comply with underwriting guidelines, and compel the sellers of ineligible loans to bear the costs of modifying or repurchasing them.  Patrick further states that if these problems are not resolved within 60 days, they will trigger an Event of Default, which would allow the investors to file a lawsuit against both companies.  Patrick was careful to note that, investors “aren’t trying to halt loan modifications for troubled borrowers.”

This latest effort from Patrick and her firm appears to be larger and more well-conceived than her prior effort (discussed previously on The Subprime Shakeout), in which she was stonewalled by Bank of New York for failing to comply with the procedural preconditions to trustee action.  Instead of proceeding under a provision seeking an investigation by the Trustee that required proof of 25% of the voting rights in each tranch, which Patrick’s investors did not have, Patrick is now proceeding under Section 7.01 of the pooling and servicing agreement (PSA), relating to the remedies for identified breaches, which requires 25% of the voting rights of the entire pool.

Nevertheless, these efforts may well fail for an additional reason that was cited as a basis for Bank of New York’s refusal to comply with Patrick’s earlier request – the failure to provide evidence of a specific breach.  Though Patrick’s letter is reported to identify several provisions of the relevant PSAs that it alleges were violated, it’s unclear what, if any, specific evidence Patrick has provided that would induce the trustee to act.  A Bank of New York spokesman has already indicated that the trustee will not act in response to this letter, stating, “[The letter] appears to be directed to Countrywide and does not ask BNY Mellon to take any action. We will continue to perform our duties as trustee.”

Aside from size, the advantage of the Investor Syndicate over groups such as Patrick’s is that it is reported to have analytic methods for identifying and providing specific evidence of servicer breaches, allowing it to overcome this procedural hurdle.  However, the longer this group sits on the sidelines, the more losses will accumulate for investors, and the less relevant the Syndicate will become.  Perhaps this is why some of the investors, such as BlackRock and PIMCO, that were previously identified as members of Franklin’s group, are now reported to be considering joining Patrick’s group.  The Syndicate may want to begin taking action before it loses more investors to its competitors.

Posted in Bank of New York, BlackRock, BofA, demand letter, Event of Default, Investor Syndicate, Kathy Patrick, PIMCO, procedural hurdles, rep and warranty, repurchase, RMBS, servicer defaults, Trustees | 7 Comments

Mortgage Mess Causes Bank Stocks To Plummet

Posted on October 15, 2010 by Isaac Gradman

Bank stocks have taken a sharp hit this week as awareness regarding potential liabilities for faulty mortgages and foreclosures reaches critical mass.

You can’t turn on the TV or open a newspaper these days without seeing reports on the recent “Foreclosure Crisis” and the resulting foreclosure moratorium.  For those who have been napping, this latest crisis surrounds the issue of whether the major loan servicers were dealing with the glut of foreclosures on their books by hiring inexperienced employees to act as “robo-signers,” signing thousands of affidavits attesting to facts of which they had no knowledge.  Deposition testimony from a number of foreclosure cases has recently emerged that reveals a huge number of judicial foreclosures may have rested upon phony affidavits, and that these affidavits were the only proof provided by the banks that they had the right to foreclosure on delinquent borrowers.

While this issue has been brushed off by some as a mere administrative problem that can easily be remedied, the reaction of informed analysts and the major servicers themselves says otherwise.  BofA has now frozen foreclosures in all 50 states, even those not requiring judicial intervention to effectuate a foreclosure, joining JPMorgan Chase and Ally Financial (formerly GMAC), which had previously imposed a foreclosure moratorium in the 23 judicial foreclosure states.  Moreover, it is unclear how long these moratoria may last, as banks may not even possess the proper documentation to cure this defect and prove the right to foreclose.  A riveting and terrifying report by analyst Joshua Rosner has been circulating that argues that the banks may not have properly assigned the mortgages to the securitizations to which they were sold in the first place (see CNBC article here and great post on Naked Capitalism about the Rosner report here).  If true, this would mean that bondholders were not provided the consideration they bargained for, as their investments were essentially unsecured, rendering the investment contracts subject to rescission.  At the very least, this fact would render all improperly-assigned loans subject to repurchase for breach of the rep and warranty regarding a true sale of the mortgages to the trust, providing private-label investors, such as the Investor Syndicate, even more ammunition to use against banks and originators.

In addition, a great report called “Foreclosures Gone Wild,” explaining the nature and implications of the Foreclosure Crisis, was published by, of all entities, CitiBank (which has not yet frozen foreclosures) this week.  The report (text version available here), cites the comments Georgetown professor Adam Levitin made during a conference call hosted by the bank.  While Citibank tempers these comments by describing them as “one of the bleaker portraits of these matters and their ultimate resolution,” you’ve got to wonder whether someone at Citi is currently on the Budweiser Hot Seat over the decision to select Levitin as the featured guest.

Adding fuel to this foreclosure fire, banks are holding their Q3 earnings calls this week, and are expected to announce additional litigation reserves and loss reserves for mortgage repurchases.  JPMorgan has already announced a $1billion increase in repurchase reserves, and the transcript from the earnings call held by bank CEO Jamie Dimon earlier this week is great reading, both for what Dillon says and for what he doesn’t say.  Pay particular attention to the sections of the Q&A where Dimon confirms the banks’ apparent strategy to drag out the losses from mortgage repurchases through litigation, and his warnings that a prolonged foreclosure crisis would have “a lot of consequences, most of which would be adverse on everybody.”

On top of this, a report written by Manal Mehta, who has been a guest blogger on the Subprime Shakeout (read Mehta’s guest post on JPMorgan’s insufficient mortgage repurchase reserves here), has suddenly gone viral, and is having a material impact on the stock price of lenders and bond insurers.  Manal’s report was originally circulated in August, but got hundreds of thousands of hits in the last two days when it was posted on the website Business Insider.  The report details why Mehta, and his fund Branch Hill Capital in San Francisco, believe that Bank of American has undereserved for potential losses associated with repurchases of defective residential mortgages and why bond insurers such as MBIA will benefit from such repurchases.  The report has now been cited by The New York Times, The Street, and was featured on CNBC (see article and video here).

As the market reaction shows, not only are Wall Street analysts finally delving into reports on mortgage repurchase liability such as Mehta’s, but that the Street is coming to understand that repurchase liability is real, and poses a credible threat to banks’ balance sheets.  Though there are certainly procedural hurdles to enforcing bondholder rights that must be overcome, and the dismissal of Greenwich Financial’s lawsuit against Countrywide last week vividly illustrates the importance of complying with these preconditions, I believe that these hurdles can be properly navigated by experienced counsel, and that RMBS bondholders will eventually get their act together take the proper steps to bring massive claims against the banks.  And while the putbacks from breaches of underwriting guidelines or procedures alone could be well over 50% of these 2005 to 2007-era subprime and Alt-A pools, that number could skyrocket should analysts’ fears regarding improper assignment of mortgages prove actionable.

[Update: after linking to Citi’s report entitled, “Foreclosures Gone Wild,” complete with the statement that, “[i]t appears that in many instances during the mortgage securitization process over the past few years, the paperwork was not properly transferred,” I learned that Citi had apparently hired the firm of Kilpatrick Stockton LLP to remove the report from all Internet sites that posted it in its original form.  This article now links to the text from the repo
rt, which can be found at Foreclosure Blues.  Citi’s official response to this decision to take down the report was as follows:

“The allegation that Citi has engaged a law firm to remove a specific research report from the internet because of its content is untrue. As is standard practice with our proprietary client research, we investigate any misuse of Citi’s intellectual property.  Citi’s research is independent and in accordance with industry practice, our analysts do not comment on our Firm when discussing market activity.”]

Posted in BofA, branch hill capital, foreclosure crisis, foreclosure moratorium, improper documentation, JPMorgan, liabilities, loss estimates, rep and warranty, repurchase, robo-signers, true sale | 4 Comments

New York Judge Tosses Greenwich Suit Against Countrywide Over Loan Modifications For Failure To Follow PSA Procedure

Posted on October 13, 2010 by Isaac Gradman

In a ruling dated October 7, 2010, New York County Supreme Court Judge Barbara R. Kapnick tossed out Greenwich Financial’s lawsuit against Countrywide.  The suit sought a declaratory judgment that Countrywide had to repurchase any loans that it modified pursuant to its settlement with state Attorneys General.  The Order, available here, grants Countrywide’s Motion to Dismiss the Complaint–thereby disposing of the case entirely–because Greenwich failed to comply with the procedural preconditions to bringing suit.

In an article from the Wall St. Journal today, Greenwich attorney David Grais, of the law firm Grais & Ellsworth is quoted as saying that, “We are reviewing the opinion and considering whether to file an appeal.”  However, given the facts as recounted in Judge Kapnick’s Order, it would seem that Greenwich has a steep hill to climb to succeed on any appeal.

In its Motion to Dismiss, Countrywide, the servicer in the challenged RMBS deals, relied on Section 10.08 of the Pooling and Servicing Agreement (“PSA”), a provision that sets forth the procedural preconditions for bondholders wishing to initiate suit.  Included in these preconditions, which are standard in most PSAs, are the requirements that the bondholders to first approach the Trustee with proof of ownership of 25% of the voting rights in the Trust and proof of some Event of Default, make a written demand on the Trustee to institute an action in its own name to remedy such Default within 60 days, and provide the Trustee reasonable indemnity against costs and liabilities arising from any such suit. There is no argument from Greenwich that it failed to comply with these preconditions before bringing its action.

Instead, Greenwich argued in Opposition to the Motion to Dismiss that it was not required to comply with these preconditions for three reasons: 1) these preconditions apply only to actions that may unfairly benefit one class of bondholders over another, and Greenwich’s suit would benefit all bondholders equally; 2) the preconditions only apply where there is an Event of Default, defined as the failure of the servicer to perform certain identified acts, and not including the failure to repurchase a modified mortgage; and 3) that compliance with the preconditions is excused because such a demand would have been futile.  In support of the third point, Plaintiff argued that, soon after instituting suit, it served on the Trustee a request that it join in the suit, which the Trustee refused.  Countrywide countered that this request did not comply with the procedural preconditions of Section 10.08. Judge Kapnick rejected all of these arguments, essentially finding that the language of Section 10.08 applied broadly to all actions, and that Greenwich had failed to comply with any of these preconditions.

This result is surprising to me, given the experience of David Grais and Bill Frey, the principal of Greenwich Financial Services, in litigation surrounding RMBS deals (including Grais’ lawsuits on behalf of the Federal Home Loan Banks and Frey’s participation in the Syndicate of RMBS investors).  These are sophisticated players familiar with the preconditions to suit found in nearly every PSA from this time period.  It is also my understanding that Greenwich could have shown 25% ownership in at least some of the challenged deals, making it even more curious why they did not at least attempt to comply with Section 10.08 prior to filing suit.  Of course, they were probably correct that such an attempt would have been futile, given that most investors have encountered general resistance from Trustees when they attempt to induce action on their behalf, but at least Greenwich would have then been able to make the argument that it attempted to comply but was rebuffed by the Trustee.

Perhaps there were other considerations at play that led Greenwich and Grais to file this suit prior to haggling with the Trustee and waiting the requisite 60 days to take action.  Some readers will recall that this lawsuit was filed as a response to a broad settlement–to the tune of $8.4 billion dollars–by Countrywide with the Attorneys General of 15 states (dozens more signed on after the fact) regarding Countrywide’s predatory lending practices in those states.  The settlement stipulated that Countrywide would remedy these practices by agreeing to modify over 400,000 loans to allow borrowers to stay in their homes.

There were only two glitches in this settlement, which was hailed by Jerry Brown as a great success story.  First, Countrywide no longer owned upwards of 80% of these loans it was agreeing to modify.  Because any modification imposes some kind of cost on the ultimate holder of the loan–by either reducing principal, reducing interest rates, or prolonging the repayment period–the bulk of the $8.4 billion in loan modifications would have been borne by the bondholders.  Second, the bondholders have favorable provisions in the PSAs and in the Stipulated Settlement between Countrywide and the AGs requiring the servicer to buy back any loan it agrees to modify.  Maybe the rush to the courts for a declaratory action was an effort to halt these modifications prior to their institution.

And perhaps this tactic was successful.  Countrywide and other servicers have been largely reluctant to carry out extensive loan modifications (see interesting stories here, here and here), in part because as reported in the Wall St. Journal, they fear being forced to repurchase those loans.  And the filing set the wheels of politics in motion, resulting in a full blown lobbying effort by BofA/Countrywide to encourage the passage of a Servicer Safe Harbor to shield servicers from liability for modifying mortgages.  This lobbying effort had the reciprocal effect of inducing bondholders to band together to form their own lobbying group, which group became the precursor to the Investor Syndicate gearing up to take on servicers over a broader range of originating and servicing defaults.

Still, regardless of the political motives that may have encouraged a premature filing of suit by Greenwich, Judge Kapnick’s Order illustrates the difficulties facing all bondholders wishing to pursue claims against the servicers, originators or sponsors of their RMBS holdings for losses associated with their investments.  Most PSAs require, first, proof of sufficient ownership–usually 25 to 50 percent–just to get the Trustees’ attention.  Aggregating enough RMBS holdings to meet this requirement was the primary reason the Investor Syndicate has formed.  Second, bondholders must make a demand that the Trustee institute suit in its own name.  Often, the Trustee will seek unreasonable indemnity from bondholders and require the execution of onerous confidentiality agreements prior to doing so.  Then, the bondholders have to sit on their hands and wait for the Trustee to decide not to institute an action before they can do so on their own.

Many investors appear unwilling to navigate the complexities or incur the expense of jumping through these procedural hurdles prior to taking action.  Just last month, Bank of New York, one of the primary Trustees on 2005- to 2007-vintage RMBS deals, refused a demand to investigate by a group of investors, represented by Kathy Patrick of Houston law firm Gibbs & Bruns, because of a failure to comply with procedural preconditions.  Sources indicate that this investor group failed to meet the peculiar obligation of the investigation provision under which it attempted to proceed, requiring 25% ownership in every class of securities, and that the group failed to identify particular Events of Default to trigger Bank of New York’s obligations.  In short, as the dismissal of Greenwich’s suit against Countrywide and the rejection of Gibbs & Bruns’ efforts illustrate vividly, procedure cannot be ignored, and it would behoove investors to get their ducks in a row before taking expensive legal action.

Posted in Bank of New York, BofA, bondholder actions, Countrywide, Greenwich Financial Services, loan modifications, motions to dismiss, procedural hurdles, settlements, William Frey | 6 Comments