BOA TO PAY $8.5 BILLION TO INVESTORS: IS BALANCE REDUCED OR PAID ON LOANS IN THE POOL?

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EDITOR’S NOTE: The investors put up the money for the funding of mortgage transactions with BOA and other investment banking operations brokering the deal. Now BOA is about to pay the largest settlement to investors so far. The real question is that if the investors were the real creditors, which they were, then the obligation from borrowers should be prorated downward. If BOA is buying these pools that were never filled it doesn’t mean that the pools gain any more credibility as having the assets claimed for the pool than they had before.

And if BOA wants to move into the shoes of the investors they are faced with the same conundrum that the investors had when they decided to abandon claims against homeowners and seek redress from BOA, to wit: do they really want to move directly into the line of fire of a hail of defenses, affirmative defenses and counterclaims for predatory and fraudulent lending? And is there anyway that they can say that their claim was secured when the loans were never transferred by proper documentation or delivery?

This is a classic PR move for Wall Street. This is a fake scenario in which the true liability is being masked by a friendly deal. They are taking hundreds of billions and probably trillions in liability and attempting to distill it down to what appears to be a large a number but in reality is less than 1% of the total liability. This isn’t the end of it even if they want it to be.

But in the meanwhile, brokers and investors will be hearing what they want to hear and BOA stock will inch up a bit.

The reality is that these bonds are worthless  and always were worthless. Any balance sheet item anywhere is a fake if it is based upon mortgages or mortgage bonds whose value is derived from mortgage loans.

The loans were not originated in a standard contractual manner — the borrower and the lender were shown, and each agreed, to two different sets of documents. They treated the loans as if they were transferred but never actually transferred them. So the mortgage was invalid at inception and even if it wasn’t, is not perfected as a lien. The amount due is clearly effected by these settlements, but more than that, we can see that the investors as creditors have clearly abandoned their claims against the so-called borrowers.

Breaking News: BofA Close to Reaching $8.5 bn Settlement with
BlackRock, PIMCO (100th Post)
Posted By igradman On June 29, 2011 (12:10 am) In allocation of loss,
balance sheets, banks, BlackRock, BofA, bondholder actions, contract
rights, Countrywide, damages, demand letter, Freddie Mac, investors,
Kathy Patrick, lawsuits, liabilities, loss estimates, PIMCO, private
label MBS, putbacks, RMBS, settlements

As part of the Subprime Shakeout’s 100th Post (woo-hoo!), I bring you
an analysis of some big, breaking news: today, the Wall Street Journal
reported that Bank of America was closing in on an agreement with the
investor group led by Kathy Patrick to pay $8.5 billion to settle
claims over mortgage backed securities.  If true, this would be the
largest MBS settlement to date arising out of the mortgage crisis.

I first reported on this investor effort back in October 2010.  You
can find my initial take here, a link to the demand letter sent by
Patrick here, and a link to the response fired off by BofA here.
While we heard early in 2011 that the parties would extend all
deadlines while they negotiated, we had heard very little about the
progress of these efforts until today.

While the details of the purported settlement are sketchy, the WSJ
report states that the current investor group includes 22
institutions, including BlackRock, PIMCO, the New York Fed, MetLife
and Freddie Mac, which collectively hold $56 billion worth of
mid-2000s vintage MBS.  Though it did not report on any impending
settlement, Bloomberg also published an article today on these
negotiations, and stated that the value of the securities at issue was
$84 billion, while the original principal value of the securities was
$182 billion.  While it is not entirely clear how these numbers line
up, my best guess is that the investor group holds approximately $56
billion of the $84 billion outstanding.

What’s also unclear is how much of the reduction in the value of the
bonds at issue is as a result of pay-downs and prepayments, and how
much is as a result of the trusts taking losses on foreclosed
properties.  Thus, it is difficult to assess what percentage of
potential damages from investor claims is being born by BofA under the
settlement.  My initial reaction is that, while the absolute dollar
amount sounds large, this settlement is ultimately fairly small
compared to the potential damages.

This result would be consistent with the consensus among commentators
regarding this investor group, including some of the comments
contained in today’s Bloomberg article and my initial take on this
effort: namely, the investors involved have significant other business
dealings with BofA (a.k.a. conflicts), and thus would not seek an
aggressive settlement.  At the same time, BofA has exhibited a growing
interest in resolving its legacy RMBS liability, and thus would be
interested in entering into a sweetheart settlement with a prominent
group of investors that would set a precedential ceiling on future
recoveries and discourage other investors from coming forward.

Without seeing the terms of the settlement and the details of the
group’s holdings, it’s impossible to know what claims are being
released in this settlement and how the proceeds are to be shared.
For example, if the group is being paid outside of the trust
waterfalls, and thus receiving the entire $8.5 billion, then the
investors would actually be recovering much larger proportion of their
potential damages (while potentially throwing the other investors who
did not participate in the settlement under the bus, either by
purporting to release their claims, or by making it impossible for
those other investors to gain standing to sue).

However, sources have indicated that the settlement funds will
actually be paid into the trust waterfalls.  This would be ostensibly
more equitable, in that all bondholders would be entitled to receive a
share of the settlement proceeds, depending on their seniority.
However, query how equitable it really is for a portion of the
bondholders (and most likely the senior portion, since these are
primarily institutional investors) to set the settlement amount for
the rest of the non-participating bondholders, and to receive the
lion’s share of the benefits based on their more senior bond position.
Whether the investor group could or would engineer such a settlement
remains to be seen.

Regardless, the fact that these investors got any money at all out of
the nation’s largest bank, let alone a material dollar amount, might
actually encourage other investors to come forward.  A settlement of
this size would reveal that BofA’s initial rhetoric, that it would
fight these claims tooth and nail until they were forced to pay, was
just that–empty rhetoric.  For example, BofA CEO Brian Moynihan stated
during the company’s third quarter 2010 earnings call that, “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.”
Further, this settlement undermines BofA’s recent estimate that the
cost of its legacy RMBS putback issues would not exceed $10 billion.
BofA cannot seriously assume that this is the only large investor
group with which it will have to tangle over defective Countrywide
loans.

The simple truth is that investors have significant amounts of viable
repurchase and Securities Act claims stemming from their purchase of
Countrywide-issued or originated MBS, and BofA will be forced to
confront many additional claims by investors in the coming years.
These additional investors might not have the same level of business
dealings with BofA and thus might be willing to take more aggressive
steps in pursuing reimbursement for its losses.  In that case, BofA’s
strategy of creating a lowball settlement to discourage investors from
coming forward might end up backfiring and further eroding the already
strained capital on BofA’s balance sheet.

Article taken from The Subprime Shakeout – http://www.subprimeshakeout.com
URL to article:
breaking-news-bofa-close-to-reaching-8-5-bn-settlement-with-blackrock-pimco-100th-post.html

Tags: bankruptcy, BOA Settlement, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
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