Plenty of smart people have weighed in on the Bank of America settlement with investors on $424 billion worth of mortgage backed securities. BofA will provide up to $14 billion in the settlement – $8.5 billion in cash, another $5.5 billion potentially in the next quarter – which they claim will cover all of the RMBS issued by Countrywide (they admit that Countrywide was the worst deal they ever made).
It does seem that the BofA deal is calculated to provide a broad waiver on the chain of title and documentation issues that have bedeviled the mortgage industry and significantly delayed foreclosures from processing. In fact, the whole deal appears designed to speed those foreclosures along.
In the largest settlement to date related to the rogue mortgage lending wave, Bank of America said Wednesday it would pay $8.5 billion to settle claims with investors holding about $100 billion worth of mortgage-related securities sold by its Countrywide unit. The winners include 22 large investors such as Pimco, Metropolitan Life and BlackRock, as well as the Federal Reserve Bank of New York.
Aside from their claims that Countrywide sold them bonds backed by faulty loans, the investors argued that by continuing to service bad loans rather than speeding up foreclosures, the Bank of America unit ran up servicing fees, profiting at the expense of investors.
As a result the settlement includes a promise to hire additional “subservicers” to speed up the foreclosure process for high-risk loans. That means Bank of America borrowers whose foreclosure have been on hold may now see the process accelerated.
There’s just a huge bluff going on in this deal. The investors who have signed onto it represent only 1/4 of the total investors allegedly covered by the deal. The trustee, the Mellon Bank of New York, is operating on the behalf of the rest of the investors, in some cases in RMBS deals where the investors involved represent far less than 1/4 of the total, which is a key threshold. They’re also getting paid by BofA on legal fees. That’s right – the bank doing the settling is paying the freight for the lawyers who are then supposed to represent the other side of the settlement. What’s more, the investors haven’t even filed a lawsuit, settling on the basis of a letter. There’s a conspiracy of silence not to bring up these larger chain of title issues, for fear that it would bust the financial industry wide open.
Not to mention that the Bank of New York is completely exposed on the chain of title issues that they’re giving away. They are responsible for conveying the mortgage to the trust properly; if they get their investors to waive any claims on those issues, they’re essentially indemnifying themselves. This goes well beyond the initial reason the investors sought the repurchases, because the loans were worse than Countrywide represented to them.
Isaac Gradman notes that the investors not a party to this deal should be asking a lot of questions:
All of this leads me to the main point of this article: investors must — and, in my opinion, will — challenge this settlement as not in the interests of the majority of bondholders. BoNY, which has filed the settlement petition in New York state court and will be advocating for its approval, has no financial interest in recovering additional money for investors. In fact, it has a far greater economic incentive to keep BofA happy, as BofA has the potential to hire the bank for many more trustee gigs and other financial services roles in the future. Further, BoNY has proven since the onset of the mortgage crisis to be one of the least cooperative trustees for investors, throwing up roadblock after roadblock to its having to work with investors to resolve putback issues. This is likely why BofNY has so readily thrown its weight behind this settlement, which will allow it to end the back and forth with investors over all of its Countrywide deals (as far as I know, BofNY is the trustee on all Countrywide-issued RMBS deals).
Thus, outside investors cannot rely on the trustee to act as a fiduciary for its interests. And there are several issues that investors will want to make sure the court considers. As an initial matter, according to Kathy Patrick, the 22 investors involved have voting rights in only 502 out of the 530 trusts. This means that they are releasing claims for 28 trusts in which they hold absolutely no interest (this is no small number – the $1.6 billion AGO settlement with BofA covered a portion of 29 RMBS trusts).
The person in the best position to deal with this is New York AG Eric Schneiderman. He has a duty to not have his investigation on documentation and chain of title issues subverted by this settlement, which will only beget more settlements. Schneiderman has been excellent in taking on the banks. This settlement represents a challenge and he has the ability to question this in court. His office says that he’s reviewing the BofA deal. Hopefully we’ll hear more on this soon.