Another Back-Door Bailout of Bank of America?
December was a bad month for Bank of America, with two major setbacks in the courts over efforts to force it to buy back poor-quality mortgages that Countrywide packaged into mortgage-backed securities and foisted off on unsuspecting investors. Because BofA purchased Countrywide back in 2008, it is now responsible for claims against that institution.
First, MBIA won a ruling that allows it to use “statistical sampling” to prove that Countrywide lied about the quality of these mortgages; BofA’s CEO had vowed to fight these claims “mortgage by mortgage,” which would have been prohibitively expensive for plaintiffs. Now, plaintiffs can analyze a “sample” of mortgages from each security pool rather than each and every mortgage, which is a huge victory for MBIA and other plaintiffs.
Next, Allstate sued BofA over mortgage-backed securities bought from Countrywide back in 2005, alleging “fraud, negligent misrepresentation and violation of U.S. securities laws”; essentially, Allstate is claiming that Countrywide lied in the “representations and warranties” it had made about the quality of the mortgages underlying those securities. In its filing, Allstate presented a series of “smoking guns” that have emerged from other lawsuits against Countrywide, clearly demonstrating that the quality of those mortgages was far inferior to what was claimed the information provided to investors.
So it was something of a shock on Jan. 3, when BofA announced that it has reached a paltry $4 billion settlement with Fannie and Freddie over “outstanding and potential repurchase claims” by the GSEs against BofA over “legacy Countrywide loans.” Industry observers were incredulous over how the GSEs came to a settlement with BofA, just as the courts were beginning to shed disinfecting sunlight on Countrywide’s egregious behavior. More shocking was the amount of the settlement, which amounted to only about two cents on the dollar value of mortgages covered by the settlement. The only rational explanation appears to be that the GSEs, under orders from their government overseers (remember, the U.S. government, i.e., we taxpayers, now own 80% of both Fannie and Freddie), are making yet another back-door bailout of BofA, which most objective observers agree would be insolvent were it forced to buy back the bad mortgages made by Countrywide.
Diving deeper into the BofA press release reveals a vast disparity in the two settlements. For $1.3 billion, Freddie agreed to settle all “outstanding and potential” claims related to $127 billion of Countrywide mortgages that it had purchased—a recovery rate of about one penny on each dollar. In contrast, Fannie agreed to take $1.5 billion to settle only existing claims on only $4 billion of Countrywide mortgages that it had purchased—a recovery rate of 38 cents on the dollar. Clearly, Fannie appears to be holding out for a much larger payday, as it purchased more than half a trillion dollars in mortgages from Countrywide. So why did Freddie offer BofA such a sweet deal? That is an interesting question that Congressional investigators should be asking!
