(photo: stevendepolo via Flickr)


Kind of a big deal in the whole Countrywide and Bank of America mortgage mess happened late this afternoon. The Attorney General of New York has filed a fraud suit against the trustee of the mortgage pool, Bank of New Your.

Back when Countrywide was bought, B of A really got a pig in a poke. They bought the company and the company had not done what it needed to in order legally securitize the mortgage pools they owned. The basic problem is the one we’ve seen over and over again in this shit pile, they did not have the proper documentation for many of the loans. But they went ahead and sold them to investors, to the tune of 182.5 billion (as in 182,500 million).

When it all went south B of A was on the hook, but they had bought Countrywide at a distressed state and have entered into negotiations with the securities holders. They got this incredibly sweet deal, they would pay 8.5 billion, about a nickel on the dollar of the value of the securities.

This deal was brokered by Bank of New York. Which is part of the problem, you see, B of A promised to pay all the expenses and any losses that Bank of New York might incur. That is so uncommon as to raise a lot of eyebrows. As Trustee Bank of New York was supposed to look out for the investors, not be in bed with B of A.

Which is where the real problems start. From the New York Times article:

Mr. Schneiderman’s contention that Bank of New York breached its duties to investors is significant because a trustee that agrees to oversee loan pools like those issued by Countrywide must abide by the rules governing the securities. Such rules require that lenders deliver to the trust complete and original mortgage documents for each loan in a pool, for example, and require that the trustee notify investors when such loan documents are missing.

Bank of New York led investors in the Countrywide pools to believe that the lender had in fact delivered complete and adequate mortgage files for each loan as was required, the lawsuit said. The bank also misled investors by confirming that loan files relating to hundreds of thousands of mortgages were complete.

For anyone following the mortgage fraud problems this sounds pretty familiar. Bank of New York is accused of the same kind of behavior that the “robo-signers” were. They are claiming that they have completed all the documentation required. They are insisting on it as matter of law. Yet when the AG started investigating random mortgages they found more and more that were not indeed completed.

This looks pretty bad. Bank of New York has been telling the investors that this nickel-on-the-dollar settlement was the best they were going to get. That is it job, but they were being paid by the bank they were negotiating the settlement with and they have not actually done the work to make the mortgages in the pools conform with the rules of the securities.

Beyond the possible fraud, there is the issue that if the securities do not meet the stated requirements, this can mean that the original seller or its successor in the form of Bank of America, can be forced to buy back the securities at the original price.

Now B of A is a huge bank, but if it is found to be on the hook through its actions and the actions of the Trustee, that means they could have a nearly 200 billion liability. Regardless of the outcome of the fraud charges it seems likely that the settlement is going to be scuttled.

Both sides were to appear in court where a judge was going to (most likely) approve the deal tomorrow. Now the NY AG will be there and he will be talking about the cozy relationship between the two banks the and evidence that lead to that office filing fraud charges.

I don’t know about you, but it looks like a really bad time to be a banker at B of A. All I can say is, good.

What is on your minds tonight Firedogs? The floor is yours

Bill Egnor

Bill Egnor

I am a life long Democrat from a political family. Work wise I am a Six Sigma Black Belt (process improvement project manager) and Freelance reporter for Govtrak.org