Twisted Titan
23rd October 2010, 11:32 AM
Big Problem for Banks: Due Process
By JOE NOCERA
Earlier this week, Bank of America, the nation’s largest consumer bank, reported its third-quarter earnings. It was a very good quarter; putting aside an accounting charge — a very large, $10.4 billion accounting charge, admittedly — the bank reported $3.1 billion in profits. It was the third consecutive quarter that Bank of America had earned more than $3 billion.
During the ensuing conference call Tuesday morning, there was the requisite chest-thumping from Brian Moynihan, the chief executive, and Chuck Noski, the chief financial officer. But there was also something else: tough talk about two big legal problems the bank faces as a result of the subprime bubble. Not surprising, it was the latter that caught my attention.
Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist. As a result of the mounting publicity, many big banks had halted all foreclosures while they reviewed the legality of their affidavits.
Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears.
Thus the bank’s central position is that, since it is so doggone obvious that the homeowners can’t pay their mortgages, the fact that the affidavits might not have complied with the law shouldn’t cause anyone to break into a sweat. At one point Mr. Noski actually said, “I think it’s a big issue because people are losing homes. It’s not a big issue” for the servicers. Glad he cleared that up.
The prospect of a second legal assault is more recent. Shortly before the earnings call, Bank of America received a letter from a lawyer representing eight powerful institutional investors, including BlackRock, Pimco and — most amazing of all — the New York Federal Reserve. The letter was a not-so-veiled threat to sue the bank unless it agrees to buy back billions of dollars worth of loans that are in securitized mortgage bonds the investors own.
Mainly, they are saying that Bank of America was servicing loans in these bonds that the bank knew violated the underwriting standards that the investors had been led to believe the bank was conforming to. What’s more, they said, the bank had never come clean about all the bad loans, as it was required to do. Therefore, say the investors, the bank has a contractual obligation to buy back the bad loans.
During the conference call, Mr. Moynihan and Mr. Noski made it clear that Bank of America was going to use hand-to-hand combat to fight back these claims. “We’re protecting the shareholders’ money,” Mr. Moynihan said. Mr. Noski questioned whether the investors even had the right to bring the case. “We continue to review and assess the letter and have a number of questions about its content including whether these investors actually have standing to bring these claims,” he said.
So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.
Apparently, being the biggest bank in the country means never having to say you’re sorry.
•
In truth, it’s not really Bank of America itself that persuaded so many people to borrow beyond their means and then sold those terrible loans to investors. It was Countrywide, which Bank of America purchased in July 2008, by which time the company was on the verge of collapse because of all the corrosive subprime loans it had made.
Before the acquisition, Bank of America was already one of the biggest servicers of mortgages. After the acquisition, it was gargantuan. From a standing start in 1968, Countrywide had become — by far — the No. 1 mortgage originator in the country, and the No. 1 servicer as well.
But during the subprime bubble, it had debased itself to maintain that No. 1 position, becoming a hotbed of fraud and predatory lending. Take, for instance, the facts that have been revealed in a lawsuit filed against Countrywide by the Mortgage Guaranty Insurance Corporation, which insured many of Countrywide’s loans. Mortgage Guaranty investigators tracked down some of the people who had gotten subprime mortgages from Countrywide. What they discovered was startling.
A loan for $360,000 went to a Chicago woman who supposedly earned $6,833 a month at an auto body shop. In truth she was a part-time housekeeper who was posing as the buyer to help her sister. The Countrywide loan officer not only knew these facts, she came up with the idea of having the borrower pretend to work at the auto body shop.
The lawsuit uncovered a raft of similar examples — case after case where the loan officers not only knew that fraud was being committed, but were actively engaged in committing it. “By about 2006,” says the lawsuit, “Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent.” And that is just one small subset of what went on at Countrywide. The truth is, any rock you turn over in the Countrywide subprime portfolio, something slimy is going to emerge.
That’s why most people, myself included, have no sympathy for Bank of America’s legal predicament — and no patience for its “we’re not the bad guys here” arguments. It is absolutely true that the homeowners that Bank of America wants to foreclose on are in default on loans they should never have gotten in the first place. (Gee, whose fault was that?) But it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.
“Just because the homeowner hasn’t paid his mortgage doesn’t mean anybody in the world can kick him out,” said Katherine Porter, a visiting law professor at Harvard. “The bank has to have the standing to do that.” She added that the bank’s argument was a little like saying that someone who committed a crime shouldn’t receive a trial because he’s so obviously guilty. America just isn’t supposed to work that way.
That’s also why the bank’s contention that the foreclosure scandal will soon be behind it is unlikely to hold true. Peter Ticktin, a Florida lawyer who represents some 3,000 homeowners, told me that he did not believe it was possible for Bank of America to have properly vetted those 102,000 affidavits in a matter of weeks.
“My hat is off to them for doing the impossible,” he said, his voice dripping with sarcasm. “They figured out how to take a massive amount of perjured affidavits and turn them into real ones without robo-signers.” Mr. Ticktin said he had every intention of continuing to challenge Bank of America foreclosures. Most other lawyers specializing in these cases plan to do likewise. The affidavit scandal isn’t over yet, no matter how much Mr. Moynihan might wish it to be so.
As for the potential lawsuit with BlackRock and the New York Fed, the week before the investors sent the letter to Bank of America, three Countrywide executives, including former C.E.O. Angelo Mozilo, settled charges brought by the S.E.C. that they had engaged in fraudulent conduct. Internal Countrywide e-mail clearly show that they knew how dangerous their lending had become. Once the loans were sold to Wall Street — which, I should note, aggressively pushed the subprime companies to lower their standards — they went through a due diligence process that investors never knew about. Banks took advantage of investors every bit as much as they took advantage of home buyers.
And it would be nice, if just once, they would admit it. Instead, we get Mr. Noski, the chief financial officer, promising that the bank will fight these cases to the death because they’re looking out for shareholders. It’s appalling, really.
I admit it: I want to see the banks feel some pain. Most people do, I think. Banks did terrible things during the subprime bubble, and they still haven’t paid any real price. I find myself rooting for judges to rule against banks in foreclosure cases. I would love to see these big investors put the serious hurt on Bank of America, which will encourage other investors to pile on. I know this colors my thinking. I can’t help it.
Yet I also know the flip side. If the foreclosure lawyers start winning a lot of cases, if judges halt foreclosures on a widespread basis, if investors start to extract billions upon billions of dollars from the banks — and if banks become seriously weakened as a result — we’ll be right back where we were two years ago. The banks will need to be saved for the good of the economy. The taxpayers will have to come to the rescue. That’s an appalling prospect too.
Banks: We can’t live with them, and we can’t live without them. It stinks, doesn’t it?
By JOE NOCERA
Earlier this week, Bank of America, the nation’s largest consumer bank, reported its third-quarter earnings. It was a very good quarter; putting aside an accounting charge — a very large, $10.4 billion accounting charge, admittedly — the bank reported $3.1 billion in profits. It was the third consecutive quarter that Bank of America had earned more than $3 billion.
During the ensuing conference call Tuesday morning, there was the requisite chest-thumping from Brian Moynihan, the chief executive, and Chuck Noski, the chief financial officer. But there was also something else: tough talk about two big legal problems the bank faces as a result of the subprime bubble. Not surprising, it was the latter that caught my attention.
Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist. As a result of the mounting publicity, many big banks had halted all foreclosures while they reviewed the legality of their affidavits.
Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears.
Thus the bank’s central position is that, since it is so doggone obvious that the homeowners can’t pay their mortgages, the fact that the affidavits might not have complied with the law shouldn’t cause anyone to break into a sweat. At one point Mr. Noski actually said, “I think it’s a big issue because people are losing homes. It’s not a big issue” for the servicers. Glad he cleared that up.
The prospect of a second legal assault is more recent. Shortly before the earnings call, Bank of America received a letter from a lawyer representing eight powerful institutional investors, including BlackRock, Pimco and — most amazing of all — the New York Federal Reserve. The letter was a not-so-veiled threat to sue the bank unless it agrees to buy back billions of dollars worth of loans that are in securitized mortgage bonds the investors own.
Mainly, they are saying that Bank of America was servicing loans in these bonds that the bank knew violated the underwriting standards that the investors had been led to believe the bank was conforming to. What’s more, they said, the bank had never come clean about all the bad loans, as it was required to do. Therefore, say the investors, the bank has a contractual obligation to buy back the bad loans.
During the conference call, Mr. Moynihan and Mr. Noski made it clear that Bank of America was going to use hand-to-hand combat to fight back these claims. “We’re protecting the shareholders’ money,” Mr. Moynihan said. Mr. Noski questioned whether the investors even had the right to bring the case. “We continue to review and assess the letter and have a number of questions about its content including whether these investors actually have standing to bring these claims,” he said.
So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.
Apparently, being the biggest bank in the country means never having to say you’re sorry.
•
In truth, it’s not really Bank of America itself that persuaded so many people to borrow beyond their means and then sold those terrible loans to investors. It was Countrywide, which Bank of America purchased in July 2008, by which time the company was on the verge of collapse because of all the corrosive subprime loans it had made.
Before the acquisition, Bank of America was already one of the biggest servicers of mortgages. After the acquisition, it was gargantuan. From a standing start in 1968, Countrywide had become — by far — the No. 1 mortgage originator in the country, and the No. 1 servicer as well.
But during the subprime bubble, it had debased itself to maintain that No. 1 position, becoming a hotbed of fraud and predatory lending. Take, for instance, the facts that have been revealed in a lawsuit filed against Countrywide by the Mortgage Guaranty Insurance Corporation, which insured many of Countrywide’s loans. Mortgage Guaranty investigators tracked down some of the people who had gotten subprime mortgages from Countrywide. What they discovered was startling.
A loan for $360,000 went to a Chicago woman who supposedly earned $6,833 a month at an auto body shop. In truth she was a part-time housekeeper who was posing as the buyer to help her sister. The Countrywide loan officer not only knew these facts, she came up with the idea of having the borrower pretend to work at the auto body shop.
The lawsuit uncovered a raft of similar examples — case after case where the loan officers not only knew that fraud was being committed, but were actively engaged in committing it. “By about 2006,” says the lawsuit, “Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent.” And that is just one small subset of what went on at Countrywide. The truth is, any rock you turn over in the Countrywide subprime portfolio, something slimy is going to emerge.
That’s why most people, myself included, have no sympathy for Bank of America’s legal predicament — and no patience for its “we’re not the bad guys here” arguments. It is absolutely true that the homeowners that Bank of America wants to foreclose on are in default on loans they should never have gotten in the first place. (Gee, whose fault was that?) But it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.
“Just because the homeowner hasn’t paid his mortgage doesn’t mean anybody in the world can kick him out,” said Katherine Porter, a visiting law professor at Harvard. “The bank has to have the standing to do that.” She added that the bank’s argument was a little like saying that someone who committed a crime shouldn’t receive a trial because he’s so obviously guilty. America just isn’t supposed to work that way.
That’s also why the bank’s contention that the foreclosure scandal will soon be behind it is unlikely to hold true. Peter Ticktin, a Florida lawyer who represents some 3,000 homeowners, told me that he did not believe it was possible for Bank of America to have properly vetted those 102,000 affidavits in a matter of weeks.
“My hat is off to them for doing the impossible,” he said, his voice dripping with sarcasm. “They figured out how to take a massive amount of perjured affidavits and turn them into real ones without robo-signers.” Mr. Ticktin said he had every intention of continuing to challenge Bank of America foreclosures. Most other lawyers specializing in these cases plan to do likewise. The affidavit scandal isn’t over yet, no matter how much Mr. Moynihan might wish it to be so.
As for the potential lawsuit with BlackRock and the New York Fed, the week before the investors sent the letter to Bank of America, three Countrywide executives, including former C.E.O. Angelo Mozilo, settled charges brought by the S.E.C. that they had engaged in fraudulent conduct. Internal Countrywide e-mail clearly show that they knew how dangerous their lending had become. Once the loans were sold to Wall Street — which, I should note, aggressively pushed the subprime companies to lower their standards — they went through a due diligence process that investors never knew about. Banks took advantage of investors every bit as much as they took advantage of home buyers.
And it would be nice, if just once, they would admit it. Instead, we get Mr. Noski, the chief financial officer, promising that the bank will fight these cases to the death because they’re looking out for shareholders. It’s appalling, really.
I admit it: I want to see the banks feel some pain. Most people do, I think. Banks did terrible things during the subprime bubble, and they still haven’t paid any real price. I find myself rooting for judges to rule against banks in foreclosure cases. I would love to see these big investors put the serious hurt on Bank of America, which will encourage other investors to pile on. I know this colors my thinking. I can’t help it.
Yet I also know the flip side. If the foreclosure lawyers start winning a lot of cases, if judges halt foreclosures on a widespread basis, if investors start to extract billions upon billions of dollars from the banks — and if banks become seriously weakened as a result — we’ll be right back where we were two years ago. The banks will need to be saved for the good of the economy. The taxpayers will have to come to the rescue. That’s an appalling prospect too.
Banks: We can’t live with them, and we can’t live without them. It stinks, doesn’t it?