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Bank of America Being Pushed Toward Receivership
Neil Garfield |
November 1, 2010 at 5:23
am
URL: http://wp.me/p7SnH-2D4
Editor's Comment: Simon Johnson warned us this day would come. And
he wasn't the only one. In the article below he
describes BOA's
position as "precarious," arising from the growing number of claims
from investors who
"purchased" Mortgage bonds or some similar
derivative or synthetic derivative. They want their money back,
100 cents on the dollar and BOA doesn't have it.
Estimated claims are now between $50-$100 billion MORE than
those
already disclosed, with a high probability that the estimates will
rise just we saw in 2007-2008. Johnson,
a former economist for the
International Monetary Fund (IMF) echoes the opinions of many other
analysts that there
is even the possibility of the losses rising back
into the trillions for the players in the securitization market. With
a bailout all but impossible both politically and economically,
BOA seems to have painted itself into a corner perhaps
more so than
the other mega banks.
With others wondering if BOA will be downgraded from present
ratings,
it looks to me like we are seeing the re-play I predicted
2 years ago. The problem that won't go away is that these deals
are nearly pure vapor. The homes were given inflated appraisals
that were confirmed in a non-existent underwriting
process, that
frequently charged no-doc customers an extra point or more per year
in interest to offset the non-existent
"risk." The applications
were fabricated by loan brokers and loan originators and the only
thing that
happened was that a lot of people were given access to
the flow of money without any paperwork to back it up. Access
to
the money is not the same as ownership of the loan and a bad loan
is never going to get better without major
renovation.
The put-back liability stems from the contractual promise that
industry standard loan underwriting
practices would be used with
homeowners seeking financing. There was also the hidden yield
spread premium that investors
are starting to get acquainted
with, and what they see, they don't like. So the promise was that
good business practices,
lending practices and industry standard
underwriting would be the way things were done. We all know that
didn't
happen. Whether the investors' claim (or the FED or the
insurers, or the counterparties on credit default swaps) is based
on fraud or on breach of contract, the results are basically the
same with the chaser being the possibility of treble
damages. BOA
doesn't have that kind of capital even if it "finds" the tier 2
YSP money that disappeared
between what they took from investors
and what they actually funded in loans.
For reasons that can only be
attributed to cultural attitude, the
claims of the borrowers of wrong-doing, title snafu, deceptive and
wrongful
lending practices, and appraisal fraud are being taken more
seriously when they come from suits costing $2,000 more than
the
threads of homeowner's lawyers. The claims are considered real and
based on sound legal grounds. In plain words,
the investors funded $1
on property worth 20 cents. Homeowners accepted liability of 50 cents
for the property worth
20 cents. Investment bankers pocketed the
unfunded money from investors and deceived them and the homeowners
with
misrepresentations of the size and quality of the loans.
Bottom Line: The banks have a double liability in both
the direction
of the investor who loaned the money and the homeowner who borrowed
it. Some very intelligent people
let arrogance make them act
incredibly stupid. Now, like all Ponzi schemes, the game is over, no
new money is coming
in, the house cards has collapsed and like with
Madoff, people all want their money back or the deal they signed up
for. Like Madoff, the money isn't there. And to make matters worse,
the losses on the credit default swaps that taxpayers
bailed out
were not losses, as we have been saying here for many months.
The real losses were incurred by
the investors, the homeowners,
then the Fed, insurers and other parties. As far as I can see,
there is no way out
for BOA. And Federal policy needs to follow
the lead of the 50-state policy of forcing modifications where
the loans
are corrected to reality and terms adjusted to make it
appealing for all parties to sign on. Otherwise, the homeowners
all get their homes for nothing and the investors suffer a 100%
loss --- especially if BOA goes underwater (pardon
the pun). And
then of course there is the question of jail, as each of the junior
people flip over on people who
were their superiors. I'd rather see
a settlement where our society is put back on track than get the
satisfaction
of seeing a few people go to prison. True, they belong
there if there is proof of a crime, but it doesn't fix anything.
Unless settled confidentially, these investor demands (including the
Federal Reserve's demand, and the insurers
who already forked over
billions and now disclaim further liability) will almost certainly
prove the borrower's
claims that are based essentially on the same
facts and mostly the same theories of law.Victory by the investors
will
be a victory for borrowers and vica versa.
LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL
An
Early Stress Test For The Financial Stability Oversight Council
with 82 comments
By Simon Johnson
How much damage to the financial system should we expect from what
is now commonly called the foreclosure morass,
the still-developing
scandal involving document robo-signing (and robo-dockets),
completely messed up mortgage paperwork
and high-profile inquiries
into accusations of systematic and deliberate misbehavior by banks?
The damage
to banks' reputation is immeasurable. They have undermined
property rights - the ability to establish clear title is
a founding
idea of the American republic. They have mistreated customers in a
completely unacceptable manner. If
anyone doubted the need for a new
consumer protection agency dealing with financial products - and the
importance
of having a clear-thinking reformer like Elizabeth Warren
at its head - they are presumably silenced by recent events.
(If
you need to get up to speed on the basics of this issue, see this
series of posts by Mike Konczal.)
But what is the cost in terms of additional likely losses to big
banks? The likely size and nature of these are leading
to exactly
the kind of systemic risks that the Financial Stability Oversight
Council was recently established to
anticipate and deal with.
It is hard to know how the precise numbers for losses will end
up, so much uncertainty
remains about the basic parameters of the
foreclosure problem. A lot of smart people are looking for ways to
sue
the big banks - in particular to force them to take back (at
face value) securities that were issued based on some underlying
degree of deception.
This is a fast-evolving situation in which every day brings
potentially significant
news, but our baseline view is that the
losses are in the range of $50 billion to $100 billion - that is,
these
are "new" losses not yet recognized by banks. (Our downside
scenario, with perhaps a 10 percent probability,
is that the losses
are much larger.) Most of this is so-called putbacks to the banks
from Fannie Mae and Freddie
Mac, meaning that the banks are forced
to take back on to their books the underlying securities (and absorb
the
associated losses) if there was significant misrepresentation
in the original documentation.
In almost all
scenarios, these additional losses will remain an order
of magnitude smaller than the trillions of dollars in credit
losses
that brought down the global financial system in 2008-9. Still,
these latest losses are not helpful to confidence
in big banks,
and the continuing uncertainty - which is entirely the banks' own
fault -will make their managements
more cautious about extending
new credit.
Capital is the buffer that banks hold against losses, and
banks
really do not want to raise more capital under current
conditions. Their executives' fear about potentially having
insufficient capital will further undermine loan availability,
even for creditworthy borrowers. This is exactly what
the economic
recovery does not need.
In addition, Bank of America is a particular worry, because
its
capital position is already precarious and any downgrade by
rating agencies will push it into dangerous territory. To
the
extent the market believes that the government does not stand
fully or immediately behind Bank of America (a
view expressed by
Morgan Stanley analysts in a note this week), we should expect
pressures reminiscent of fall 2008
We also learned yesterdayof
sizable additional potential exposure from the lawsuit filed by the
Federal Reserve
Bank of New York, PIMCO and BlackRock - seeking to
force Bank of America to buy back bad mortgages packaged into $47
billion of mortgage-backed securities issued by Countrywide.
The best approach would be a fresh set of stress
tests, resulting
in the requirement that Bank of America and perhaps other banks need
to raise a specified dollar
amount of capital (not hit a particular
capital-asset ratio, as that would just result in further dumping of
assets),
and reassuring the market that other banks have sufficient
capital, including under the augmented Basel III requirements.
(For
a primer on capital requirements and the thinking that underlies
the approach we are recommending, see our
post of Oct. 7.)
Created by the Dodd-Frank financial regulatory act, the Financial
Stability Oversight Council
has plenty of power to order and organize
such stress tests. In fact, because of the powers granted to the
council
under the Kanjorski Amendment, the country's top regulators
have a complete menu of choices available in terms of what
they
can require banks to do in order to reduce risks to the system
(up to and including preemptively breaking up
big troubled banks).
The foreclosure morass clearly poses systemic risk, both through
its general effects
on uncertainty about losses and because any
manifest weakness at one big bank could spread - in some obvious
ways
and in some unanticipated ways - through the rest of the system.
In addition, the stress tests of 2009 (known as
the Supervisory
Capital Assessment Program) did not consider the possibility of large
losses arising from the litigation
now surrounding mortgage-backed
securities. When Representative Brad Miller, Democrat of North
Carolina, asked Treasury
Secretary Tim Geithner about this at a House
Financial Services Committee hearing on Sept. 22, the exchange went
like
this:
MILLER, asking about possible breach of contract in securitized
mortgages: Okay. was potential liability
on these theories taken
into account at all in the stress test? I mean, the securitizers,
who presumably would be
the defendants in any litigation, are the
19 biggest banks that got the stress tests, was their potential
liability
taken into account at all in the stress tests a year ago?
GEITHNER: I…I don't think so….
Mr. Geithner also said he would take this question up in more detail
with his colleagues at the Federal Reserve, which
administered
the 2009 stress tests. The exchange can be heard in full online,
with the Miller-Geithner exchange
at about the 42-minute mark.
The only fair, reasonable, and safe way to handle this situation is
to order
a fresh round of stress tests for all systemically important
financial institutions. The stress scenario should consider
not
just the current dismal macroeconomic prognosis (and the potential
for another slip back into recession) but
also the downside with
regard to litigation losses.
If the Financial Stability Oversight Council refuses to
act
decisively in this regard, a vital piece of the Dodd-Frank financial
reforms will have failed.
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Bloomberg: BofA Mortgage Morass Deepens on Promissory Notes Issues
This is the biggest lie and a last
ditch effort on the part of the
Banks to bring down the entire system!!!!!<http://livinglies.wordpress.com/2010/12/01/bloomberg-bofa-mortgage-morass-deepens-on-promissory-notes-issues/> They are
claiming in effect that "somehow" the "NOTES" did not get
handed to the "Trustee"... B.S.
What is NOT addressed or rather improperly addressed in this
Bloomberg article is this, they repeatedly refer
to the Mortgage
backed Securities as a "TRUST" in such a way as to imply an "ASSET
BACKED TRUST",
however the the type of trust involved here is a
"Qualified Special Purpose Entity" or QSPE, which is a type
of
"REMIC" (Real Estate Mortgage Investment Conduit). This type
of Investment product is put together
in such a way as to give
"Special" tax treatment and greatly increase the profits to the
Banks involved...
In order to "Qualify" for this special treatment,
there MUST be must be true and complete sales, first from
the Bank
to the Transferor, then from the Transferor to the Trustee who put
them into the "Pool" and before
it is all said and done the IRS
checks it all out and gives it's blessing.
Compare this to buying a very expensive
car, let's say, a GOLD PLATED
ROLLS ROYCE! So you give a friend several billion dollars to go and
buy you a car
and he gives it to a friend of his to complete the
task... So the friend's friend is off to buy the car..... and he
buys it, BUT he forgets to take the Car, he then go to your friend,
gives him the keys and your friend does not notice
that he did not
get the CAR!!! Next your friend gives you the keys and YOU do not
notice there is NO CAR ATTACHED
TO THEM!!!!!! Finally your super
rich Uncle, who gave you the money to buy the car in the first place
walks out
to the driveway to check out the deal you got... You show
him the keys and he doesn't notice that THERE IS NO CAR!!!!!
Now I'm
sure this kind of thing happens everyday, to someone else but it's
a little hard for me to swallow that
nobody noticed 2,000 to 5,000
mortgage promissory notes weren't where they were supposed to be.
I think it
more likely that the Banks and the trustee merely
engineered this situation, in order to tell the Government everything
is going to collapse if you don't Bail us out AND give us IMMUNITY
for our prior actions... So once again the Government
will SCREW
the Investors and the Homeowners and help the Banks destroy our
country! IF your loan was Securitized,
you should be able to kick
the BANKS and TRUSTS out!!!!!!!
For those with a long enough attention span, I
am including a "brief"
overview of the "REMIC" and the "QSPE" mentioned above which should
help you to understand why "NO ONE OWNS YOUR NOTE!" For further
study read Section 860 of the Internal Revenue
Code.
______________________________________________________________________
How do Lenders make new loans
by selling that 1st loan? Good
question! Let's take a small example of a $150,000 mortgage,
which is very small
by today's standards. By selling this mortgage
into Securitization, let's even say at a loss, for $100,000. The
rules
of Fractional Reserve Banking say they must put 10% aside in
"reserve", BUT the rules of Fractional Reserve
LENDING says they can
lend out 10 TIMES the amount of the remainder… huh? How can that
be? Because that's
the RULES!!!!!!!!!! They create an account out
of thin air and just say it now has $900,000 in it. So if they take
that $900,000 they can create 6 more $150,000 loans just like the one
they sold. Now if they sell those six loans into
Securitization, they
can create 36 more, sell those and create 216, sell those and you
have 1,296 loans that you
can either sell or collect profits from,
pretty slick huh! Soon, you have created SO MUCH MONEY that even your
next
door neighbor's dog can qualify for a mortgage. The problem is
there are only so many houses available, so the prices
go up and up
and up, until your $150,000 house is now worth a Million and a half.
It is important to remember
only Bankers can perform this magic
(creating money out of thin air). If you want to loan your own
money, you can
not lend more than you have. All of this created
money put out by the "Federal Reserve" gets counted and goes
onto
the National Debt, because we have to pay them interest on ALL the
money that is in circulation.
I
only took my example of creating new loans out 4 PLACES, and from
1 loan, do you think these greedy Bankers will stop
there??? Beside
that, the last time I looked there were 3,052 member banks in the
Federal Reserve System. All of
them, just slaving away trying to
make an honest buck.
What is Securitization?
In the mortgage
securitization process, collateralized securities
are issued by, and receive payments from, mortgages collected in
a collateralized mortgage pool. The collateralized mortgage pool
is treated as a trust. This trust is organized as
a special purpose
vehicle ("SPV") and a qualified special purpose entity ("QSPE") which
receives
special tax treatment for being a qualified entity. The
SPV is organized by the securitizer so that the assets of the
SPV
are shielded from the creditors of the securitizer and the parties
who manage it. Thisshielding is described
as making the assets
"bankruptcy remote".
To avoid double taxation of both the trust and the certificate
holders, mortgages are held in a Real Estate Mortgage Investment
Conduit ("REMIC"). To qualify for the single
taxable event, all
interest in the mortgage must be and is transferred forward to the
certificate holders.
The legal basis of REMICs was established by the Tax Reform Act of
1986 (100 Stat. 2085, 26 U.S.C.A. §§ 47,
1042J, which eliminated
double taxation from these securities. This was legislation that
was lobbied for vigorously
by Banking Interests and has been in
practice for nearly a quarter of a century. The principal advantage
of forming
a REMIC for the sale of mortgage-backed securities is
that REMlCs are treated as pass-through vehicles for tax purposes
helping avoid double-taxation and allowing the Banks or Lenders to
realize higher prices on the sale of Mortgages in
this way. For
instance, in most mortgage-backed securitizations, the owner of
a pool of mortgage loans (usually
the Sponsor or Master Servicer)
sells and transfers such loans to a QSPE, usually a trust, that is
designed specifically
to qualify as a REMIC, and, simultaneously,
the QSPE issues securities that are backed by cash flows generated
from
the transferred assets to investors in order to pay for the
loans along with a certain return. If the special purpose
entity,
or the assets transferred, qualify as a REMIC, then any income of
the QSPE is "passed through"
and, therefore, not taxable until the
income reaches the holders of the REMIC, also known as beneficiaries
of the
REMIC trust.
Accordingly, the trustee, the QSPE, and the other parties servicing
the trust, have no legal
or equitable interest in the securitized
mortgages. Therefore, any servicer or Trustee who alleges that they
are,
or that they have the right, or have been assigned the right, to
claim that they are the agent for the holder of the
note for purposes
of standing to bring an action of foreclosure, are stating a legal
impossibility. Any argument
containing such an allegation would be
a false assertion. Of course, that is exactly what the servicer of
a securitized
mortgage that is purported to be in default, claims.
The same is the case when a lender makes such a claim. The
party
shown as "Lender" on the mortgage note was instrumental in the sale
and issuance of the certificate,
to certificate holders which means
they knew that they were not any longer the holder of the note.
The QSPE
is a weak repository and is not engaged in active management
of the assets. So, a servicing agent is appointed. Moreover,
all
legal and equitable interest in the mortgages are required by the
REMIC to be passed through to the certificate
holders. Compliance
with the REMIC and insulating the trust assets from creditors of
third parties (who create or
service the trust) leads to unilateral
restructuring of the terms and conditions of the original note and
mortgage.
The above fact, and the enormous implications of it,
cannot be more emphatically stressed. A typical mortgage pool
consists of anywhere from 2,000 to 5,000 loans. This represents
millions of dollars in cash flow payments each month
from a
servicer (receiving payments from borrowers) to a REMIC (QSPE)
with the cash flow "passing through",
tax-free, to the trust
(REMIC), Those proceeds are not taxed until received as income to
the investors. Only the
investors have to pay taxes on the payments
of mortgage interest received. The taxes a trust would have to pay
on
30, 50, or 100 million dollars per year if this "pass through"
taxation benefit didn't exist would be substantial
and it would,
subsequently, lower the value of the certificates to the investors,
the true beneficiaries of these
trusts. Worse, what would be the
case if a trust that was organized in February 2005 were found to
have violated
the REMIC guidelines outlined in the Internal Revenue
Code? At $4 million per month in cash flow, there would arise over
$200 million in income that would now beconsidered taxable. It
is worth repeating that in order for one of these investment
trusts to qualify for the "pass through" tax benefit of a REMIC
(in other words, to be able to qualify, to
be able to be referred
to as a REMIC), ALL LEGAL AND EQUITABLE INTEREST IN THE MORTGAGES
HELD IN THE NAME OF THE
TRUST ARE VESTED IN THE INVESTORS, not in
anyone else AT ANY TIME, If legal and/or equitable interest in the
mortgages
held in the name of the trust are claimed by anyone other
than the investors, those that are making thoseclaims are either
defrauding the investors, or the homeowners & courts, or both. So,
if the trust, or a servicer, or a trustee, acting
on behalf of the
trust, is found to have violated the very strict REMIC guidelines
(put in place in order to qualify
as a REMIC), the "pass through"
tax status of the REMIC can be revoked. This, of course, would
be the
equivalent of financial Armageddon for the trust and its
investors. A REMIC can be structured as an entity (i.e., partnership,
corporation, or trust) or simply as a segregated pool of assets, so
long as the entity or pool meets certain requirements
regarding the
composition of assets and the nature of the investors' interests. No
tax is imposed at the REMIC level.
To qualify as a REMIC, all of
the interests in the REMIC mustconsist of one or more classes of
"regular interests"
and a single class of "residual interests."
Regular interests can be issued in the form of debt, stock,
partnership interests, or trust certificates, or any other form
of securities, but must provide the holder the unconditional
right
toreceive a specified principal amount and interest payments. REMIC
regular interests are treated as debt
for federal tax purposes. A
residual interest in a REMIC, which is any REMICinterest other
than a regular interest,
is, on the other hand, taxable as an
equity interest. According to Section 860 of the Internal Revenue
Code, in
order for an investment entity to qualify as a REMIC,
all steps in the "contribution" and transfer process
(of the
notes)must be true and complete sales between the parties and must
be accomplished within the three month
time limit from the date of
"startup" of the entity. Therefore, every transfer of the note(s)
must be
a true purchase and sale, and, consequently the note must
be endorsed from one entity to another. Any mortgage note/asset
identified for inclusion in an entity seeking a REMIC status must be
sold into the entity within the three-month time
period calculated
from the official startup day of the REMIC. Before securitization,
the holder of an enforceable
note has a financial responsibility for
any possible losses that may occur arising from a possible default,
which
means that holderalso, has the authority to take steps to avoid
any such losses (the right to foreclose). Securitization,
however,
effectively severs any such financial responsibility for losses from
the authority to incur or avoid those
losses. With securitization
the mortgage is converted into something different from what was
originally represented
to the homeowner. For one thing, since the
party making the decision to foreclose does not actually hold any
legal
or equitable interest in any securitized mortgage, they have
not realized any loss or damages resulting from the purported
default. Therefore, it also follows that the foreclosing party
avoids the liability, which could result if a class
of certificate
holders claimed wrongful injury resulting from a modification made
to achieve an alternate dispute
resolution. Securitization also
makes the mortgage and note unalienable. The reason is simple:
once certificates
have been issued, the note cannot be transferred,
sold or conveyed; at least not in the sense that such a transfer,
sale, or conveyance should be considered lawful, legal, and
legitimate. This is because the securitized note forever
changes
the nature of that instrument in an irreversible way, much in
the same way that individual strawberries
and individual bananas
can never be extracted, in their "whole" form, from a strawberry
banana milkshake
once they've been dropped in the blender and
the blending takes place. It might appear that the inability to
alienate
the note has no adverse consequences for the debtor,
but recent history disproves this notion. Several legislative and
executive efforts to pursue alternate dispute resolution and to
provide financial relief to distressed homeowners have
been thwarted
by the inability of the United States government to buy securitized
mortgages without purchasing most
of the certificates issued. An SPV
cannot sell any individual mortgage because individual mortgages are
not held
individually by the certificate holders; the thousands of
mortgages held in the name of the REMIC are owned collectively
by the
certificate holders. Likewise, the certificate holders cannot sell
the mortgages. All the certificate holders
have are the securities,
each of which can be publicly traded. The certificate holders are,
in no sense, holders
of any specific individual note and have no
legal or beneficial interest in any specific individual note. The
certificate
holders do not each hold undivided fractional interests
in a note, which added together, total 100%. The certificate
holders
also are not the assignees of one or more specific installment
payments made pursuant to the note.
For the certificate holder, there is no note. A certificate holder
does not look to a specific note for their investment's
income
payment Instead; the certificate holder holds a securitysimilar
to a bond with specific defined payments.
The issuer of trust
certificates is selling segments of cash flow.
The concept of securitization is brilliant;
it began as a simple
idea; a way to convert illiquid, long term debt into liquid,
tradable short term debt. It cashes
out the lender, allowing the
lender to make "new loans" while realizing an immediate profit on
the notes
sold.
How do Lenders make new loans by selling that 1st loan? Good
question! Let's take a small example
of a $150,000 mortgage,
which is very small by today's standards. By selling this mortgage
into Securitization,
let's even say at a loss, for $100,000. The
rules of Fractional Reserve Banking say they must put 10% aside in
"reserve",
BUT the rules of Fractional Reserve LENDING says they
can lend out 10 TIMES the amount of the remainder… huh?
How can
that be? Because they create an account out of thin air and just
say it now has $900,000 in it. So if they
take that $900,000 they
can create 6 more $150,000 loans just like the one they sold. Now
if they sell those six
loans into Securitization, they can create
36 more, sell those and create 216, sell those and you have 1,296
loans
that you can either sell or collect profits from, pretty slick
huh! Soon, you have created SO MUCH MONEY that even your
next door
neighbor's dog can qualify for a mortgage. The problem is there are
only so many houses available, so
the prices go up and up and up,
until your $150,000 house is now worth a Million and a half.
It is important
to remember only Bankers can perform this magic
(creating money out of thin air). If you want to loan your own
money,
you can not lend more than you have. All of this created
money put out by the "Federal Reserve" gets counted
and goes onto
the National Debt, because we have to pay them interest on ALL the
money that is in circulation.
I only took my example of creating new loans out 4 PLACES, and from
1 loan, do you think these greedy Bankers
will stop there??? Beside
that, the last time I looked there were 3,052 member banks in the
Federal Reserve System.
All of them just slaving away trying to
make an honest buck.Homeowner Beats Bank Of America In Small Claims Courthttp://www.huffingtonpost.com/2011/01/04/homeowner-beats-bank-of-a_n_804171.html
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