(Business as Usual)
Once again, “The Banks” sat in closed door sessions with the government and cooked up a deal. And (once again) who gets seared and roasted in this deal? That’s right…us..all of us…the consumers and taxpayers.
Anytime there’s any talk about bank settlement and bad conduct, realize that they are playing, to a large extent, with our money. See the highlighted portion below and understand that by to the tune of trillions of dollars, the improper conduct was engaged in using federal dollars.
When “The Banks” made loans, they were not using their own money (banks never use “their” money…but they weren’t even using shareholder money)…they were using “Fannie/Freddie” money. And as a condition of using that money, The Banks were required to follow the Fannie/Freddie underwriting and servicing requirements or suggestions or helpful hints or guidelines….whatever they were called or are called, what is absolutely apparent is that they were not following the requirements and they continue to ignore them even today…especially in the current conduct of foreclosure proceedings….the new Dodd Frank regulations notwithstanding…..
Between 2004 and the first half of 2008, Bank of America and certain
companies that it acquired in the second half of 2008 (the “acquired companies”) sold
approximately $2.1 trillion of mortgage loans and residential mortgage backed securities
(“RMBS”). Of the $2.1 trillion total, approximately $1.1 trillion were mortgage loans sold
to Government-Sponsored Enterprises (“GSEs”), primarily the Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie
Mac”). The remaining $963 billion were sold to whole loan investors and into private label
securitizations, frequently bought by large institutions. Roughly $160 billion of mortgage
loans were sold into private label securitizations containing a credit enhancement provided
by a monoline insurer. Approximately $1.8 trillion of the overall loan amounts remained
outstanding as of December 31, 2009.
In connection with the sale of these mortgage loans and RMBS
securitizations, and credit enhancements provided by monoline insurers, Bank of America,
or the acquired companies, made contractual representations and warranties regarding the
underlying mortgage loans. While terms varied by agreement and counterparty, examples
of the types of representations and warranties upon which claims could be based included
good title, conformity with underwriting guidelines, enforceability of mortgage documents,
lien position, and compliance with applicable laws.
Following the appointment of a conservator for Fannie Mae in September
2008, Bank of America received information indicating that Fannie Mae may be adopting a
more aggressive approach to asserting and contesting repurchase claims. Through the
second and third quarters of 2009, Fannie Mae increased its rate and volume of repurchase
requests. Fannie Mae submitted a combined $3 billion of claims during the final quarter of
2008 and the first three quarters of 2009. During this same time period, Fannie Mae’s
rescission rate (the percentage of claims appealed by Bank of America and subsequently
rescinded by Fannie Mae) declined. As a result, the number of “contested” or “impasse”
Fannie Mae claims grew from $41 million at Q3 2008 to $512 million at Q3 2009 and
continued to rise steadily thereafter. During the second and third quarters of 2009, a
known uncertainty existed as to whether future repurchase obligations to Fannie Mae
would have a material effect on Bank of America’s future income from continuing
operations.
Between 2004 and 2008, Bank of America and the acquired companies sold
approximately $160 billion of RMBS with monoline insurance. Bank of America did not
reserve for claims not yet submitted by the monoline insurers, or for claims submitted and
rejected by Bank of America, but not rescinded by the monoline insurers. These contested
claims increased from $203 million at September 30, 2008 to nearly $1.7 billion at
September 30, 2009. During the second and third quarters of 2009, there was a known
uncertainty as to whether future costs related to loans Bank of America would ultimately be
required to repurchase from the monolines would have a material effect on Bank of
America’s future income from continuing operations.
Bank of America failed to disclose these known uncertainties in its Forms
10-Q for the second and third quarters of 2009 (filed on August 7, and November 6, 2009).
A Bank of America registration statement supplement effective in December 2009
incorporated by reference the periodic filings. In each of these filings, Bank of America’s
MD&A failed to comply with the disclosure requirements of Item 303 of Regulation S-K.
As a result of its failure to comply with Regulation S-K, Bank of America violated
Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
Between 2004 and 2008, Bank of America sold approximately $1.1 trillion
of mortgage loans to the GSEs, including Fannie Mae, which purchased $826 billion or
75% of that amount.
The GSEs purchased and securitized mortgage loans as part of their goal to
provide government supported funding to the housing market. They were the largest
purchasers of mortgage loans and they also had the strongest representations and warranties
contact rights. The GSEs had a long history with Countrywide of asserting and resolving
repurchase claim requests.
Bank of America reserved for GSE repurchase expenses using historical
loss experience, including past GSE repurchase rates.
From at least 2005 through mid-2008, Fannie Mae served as Countrywide’s
GSE “alliance partner.” Under this arrangement, which Bank of America later continued,
Countrywide sold most of its mortgage inventory to Fannie Mae. Based on that
relationship, Fannie routinely rescinded certain types of claims rather than fully assert its
contractual rights to have the repurchase claims paid.
During the relevant period, Bank of America failed to disclose known material
uncertainties relating to (1) whether Fannie Mae had changed their repurchase practices
after being put into conservatorship, and the increasing number of claims and increasing
inventory of contested claims from Fannie Mae; and (2) the future volume of repurchase
claims from monoline insurers and the ultimate resolution of mounting contested
monoline claims. With regard to these uncertainties, Bank of America neither
determined that they were not reasonably likely to come to fruition, nor determined that,
if they came to fruition, they would not have a material impact on income from
continuing operations. These uncertainties indicated a material risk to future income
from continuing operations. Accordingly, disclosure was required.
and as a reminder
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