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Harmonic Covergence on Bank of America

Three events managed to converge today that spell increasing trouble for Bank of America. They appeared on Capitol Hill at a second Senate Banking Committee hearing on foreclosure servicing problems, and got predictably ripped to shreds. The best way to cover this hearing is to go back and read the #ffraud tag on Twitter. While BofA isn’t probably too concerned by Congressional action – only Jeff Merkley and Chris Dodd showed up to their panel, which is an appalling abdication of duty in the belief that the housing market will somehow self-correct despite historic corruption and criminality – a couple things stood out.

First, Richard Shelby seemed to disagree with any whitewash of MERS, the databasing company at the heart of many lawsuits over foreclosure fraud. Shelby’s resistance, echoed by Federal Reserve Governor Daniel Tarullo (whose testimony you should read), effectively ends the chance to somehow reset MERS as a legal entity and shut down a lot of lawsuits in state courts. This exposes the member banks, including BofA, who do business with MERS, and calls into question their standing to foreclose.

In addition, Tarullo opened the can of worms on the put-back exposure for the banks, which has investors seriously riled up.

“The essence of these claims is that mortgages in the securitization pools, or sold as unsecuritized whole loans, did not conform to representations and warranties made about their quality–specifically that the loan applications contained misrepresentations or the underwriting was not in conformance with stated standards,” Mr. Tarullo said in a testimony before the Senate Committee on Banking, Housing, and Urban Affairs.

Mr. Tarullo implies that the big banks might not have properly reserved for this problem — $13.3 billion in put back requests from Fannie and Freddie alone vs $9.7 billion in reserves for the problem among the four biggest originators. And BofA is more exposed than most here, because they own Countrywide, which has now been revealed to have habitually failed to convey mortgage notes into the trusts.

“During the third quarter of 2010, Fannie Mae collected $1.6 billion in unpaid principal balance (UPB) from originators, and currently has $7.7 billion UPB in outstanding repurchase requests, $2.8 billion of which has been outstanding for more than 120 days. Freddie Mac has $5.6 billion UPB in outstanding repurchase requests, $1.8 billion of which has been outstanding for more than 120 days. As of the third quarter of 2010, the four largest banks held $9.7 billion in repurchase reserves, most of which is intended for GSE put backs,” Mr. Tarullo said.

The big banks, like BofA, aren’t holding enough money for repurchases just from the GSEs, not even including private-label MBS investors.

Then there’s the Fed audit, showing the extent of the bailout for BofA in exchange for absolute trash loans. This is only going to lead to more questions about their actions.

Finally, you have this rumor about BofA being in Wikileaks’ sights:

[A]n eagle-eyed reader has sent me a link to a quote from a Computer World interview with Assange from October of 2009, which, if true, may contain a clue to that bank’s identity:

“At the moment, for example, we are sitting on five gigabytes from Bank of America, one of the executive’s hard drives,” he said. “Now how do we present that? It’s a difficult problem. We could just dump it all into one giant Zip file, but we know for a fact that has limited impact. To have impact, it needs to be easy for people to dive in and search it and get something out of it.”

This is consistent with the Forbes interview that Julian Assange gave.

You put enough of this together and you can understand why BofA stock took a hit yesterday, though it rebounded slightly today.

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David Dayen

David Dayen