Bank Of America In Complete Denial Over Foreclosure/Putback-Gate

Tyler Durden's picture

In an ironic twist of events, last night Bank of America's Chris Flanagan, head of MBS strategy penned an article titled: "Foreclosure Issues Pose Risks, Should Be Resolved With Time" in which the Bank of American proudly reports the following piece of supreme denial: "While that resolution should involve time, effort, and cost, we do not believe it will result in a major long–term disruption to the housing or mortgage markets...Additionally, the allocation of additional costs due to advancing and legal fees will have to worked out. We do believe that the tenets of securitization, MERS, extensive legal foundation that has been established over the last 30 years, and REMIC eligibility will stand." Well isn't it ironic, as Alanis would say... To think all this occurred when Bank of America was still just above it 15 month lows. After today's festivities, not so much. As for the tenets of, well, all those things that are supposed to stand, we are sure that is the case: after all would Moynihan wouldn't risk perjury if he was concerned that a multi-decade culture of perjury, fraud and lies could ever be overturned. The alternative of course would be jail time. And recall what happened to his securities-fraud committing predecessor. Regardless, here is the full MBS defense as presented by the bank with the most to lose when things finally get out of hand. Oddly enough, even this most KoolAided  of defenses admits that "the end result will likely be a further extension of foreclosure timelines." Which makes one wonder: just what gives the bank the confidence that it will be able to lift the moratorium within a week? And just what will happen to the firm if it is unable to sweep all these tens of billions in future losses under the rug.

Complete KoolAid, er, report:

Foreclosure Issues Pose Risks, Should Be Resolved With Time


Recently, some issues surrounding foreclosure sale proceedings have come to the forefront, leading several large banks to halt foreclosure sale proceedings in many states. The purpose of this note is twofold: to clear up some confusion on what exactly the issues at hand are and to bring some perspective to those issues. For instance, we note that the “foreclosure issue” that we are addressing here is separate from considerations surrounding potential bank loan repurchases. After the JPMorgan Chase earnings call, in which the company announced increased repurchase reserves, the two issues seem to have been muddied.

With respect to the issues surrounding foreclosure sales, while there are some outstanding risks, we think the issues that can be definitively addressed suggest a resolution could be possible over a matter of months. While that resolution should involve time, effort, and cost, we do not believe it will result in a major long–term disruption to the housing or mortgage markets.


The issues surrounding foreclosure sale proceedings were initially brought to light on September 17, when GMAC/Ally halted evictions and REO sales in 23 judicial foreclosure states. Since that time, GMAC has extended their review to all 50 states, and four other large banks have halted foreclosure sales or launched internal reviews of their foreclosure processes: Bank of America has halted foreclosure sales in 50 states, JPMorgan Chase in 41 states, PNC in 23 states, and Litton is reviewing proceedings. Wells Fargo has stated that they are reviewing all pending foreclosures, but not halting the process and are confident their processes are robust. Attorneys General from all 50 states announced Wednesday that they have formed the Mortgage Foreclosure Multistate Group to review some of the practices around foreclosures proceedings.

The “foreclosure issues” being discussed at this point seem to encompass a few distinct problems, which we think it is useful to break down: robo-signers, MERS, and trust transfers.

The Robo-Signer Issue

While judicial foreclosure proceedings vary from state to state depending on different laws, many involve the presentation of an “affidavit of debt” before the court, which certifies that an employee of the mortgage servicer is familiar with the mortgage and borrower under question. Across several servicers burdened with an increasing number of foreclosures, there were employees who allegedly signed large numbers of affidavits without “personal knowledge” of the stated information. In addition, some affidavits were not notarized at the time of affidavit signing. These deficiencies created became a problem when brought before judges.

Importantly, however, although these deficiencies introduce risk, the issue does not seem to be insurmountable. We believe that the likelihood for widespread outright forgiveness of debt in cases where affidavits were signed or attested improperly is low. The details behind resolving cases such as these are not clear from a legal standpoint, but they seem likely to be, in part, a matter of rectifying the affidavit, issues of time, effort, and cost. Similar issues exist for fixing faulty foreclosure processes from the start; it may be possible to solve the robo-signer issue by staffing up teams or via other efforts. While more costly, and likely to delay foreclosure processes a few to several months, again, in our view, the issues do not seem to be insurmountable.

The MERS Issue

A second issue that has arisen questions the validity of MERS, an electronic registration system for mortgages meant to simplify the process of transferring mortgage ownership. In the past, there have been court rulings in support of the MERS model, e.g. that holding title for the benefit of another party was valid or that foreclosure initiation in the name of MERS was valid. There have also been cases in which the model was not supported (e.g. Landmark v. Kessler in Kansas), but in most instances it seems those efforts have failed or been overturned. In the event the matters challenging MERS succeed, resolution seems to be a practical issue; while the process is unclear at this point, it may simply be a matter of assigning the mortgage from MERS to the foreclosing party in cases where foreclosure in the name of MERS is ruled against or of simply foreclosing in the name of the bank instead of in the name of MERS. There has been at least one case (U.S. Bank v. Ibanez) in Massachusetts, which calls into question the separation of legal and beneficial title holding, similar to that used in the MERS model. That case is currently under appeal.

In addition, there also seems to be some misinformation about the MERS system itself and whether some banks are utilizing it or not. MERS put out a press release yesterday to address some of these concerns, citing the fact that Chase registers their correspondent loans in MERS, but does not register their retail loans.

The Trust Transfer Issue

A third issue that has arisen concerns the validity of the trust as the owner of the mortgage for loans that have been securitized. When the  note is transferred to a trust, it is endorsed “in blank”, meaning that the owner of the note is not assigned. The note is only endorsed to the trustee or servicer on behalf of the trust if they need to institute foreclosure proceedings. Our understanding is that this is a common practice when notes are transferred to a trust. With respect to physical documents, those are delivered and held by the designated custodian for the trust. Both the seller and the custodian should have verified the existence and validity of the notes upon transfer. If there were any deficiencies, the custodian should have notified the seller to remedy any deficiencies or if they could not be remedied, put the loan back to the seller. The transfer of the notes is governed by the loan purchase agreement which also provides for evidence of ownership of the loans by the trust. Also, when the notes are transferred, the servicer records the ownership of the loans with MERS.

The Risks

The primary risk in our view is not that the affidavits issue remains unresolved, but how much time and effort the resolution will take and how far the scope of investigations expands beyond this issue. As mentioned, the Attorneys General from each state have formed a task force to look into the affidavit matter to determine if they were processed correctly under state laws. However, given that AGs from non-judicial states have joined the task force, the scope of their investigation may expand beyond this issue and lengthen the timeframe for resolution. Complicating matters is that servicers have to abide by individual state regulations with respect to foreclosure processing.

In the end, we believe that the vast majority of foreclosures will stand assuming that the actions were taken against borrowers who were delinquent. However, the end result will likely be a further extension of foreclosure timelines. We believe that the incremental increase in loss severity should be minimal if these issues can be resolved in the next 3-6 months. For servicers this means additional staffing requirements as well as increased costs. With respect to investors, headline risk will remain the predominant near term concern. Additionally, the allocation of additional costs due to advancing and legal fees will have to worked out. We do believe that the tenets of securitization, MERS, extensive legal foundation that has been established over the last 30 years, and REMIC eligibility will stand.

In other words: all shall be well, and all manner of thing shall be well.


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lsbumblebee's picture

Dick Bove not in denial but under heavy sedation:

"Goldman Sachs and Bank of America are both buys for investors, though BofA faces more difficulties because of weakness in its consumer divisions, said Dick Bove, analyst at Rochdale Securities."

MisterMousePotato's picture

I think everyone is missing the most interesting angle about this whole mess; namely, the problem (or opportunity, depending on one's point of view) of securitization of the note, or rather the lack thereof. The United States Bankruptcy Court for the Eastern District of California issued a ruling dated May 20, 2010 in the matter of In Re: Walker, Case No. 10-21656-E-11, which held, in pertinent part, that "any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law." In other words, the two (the mortgage and the note) have to be kept together for the security to be valid. The note, of course, is freely assignable, but left unsaid is what happens to the security when this is done. As a matter of 'hornbook' law, if I recall correctly, the mortgage/deed of trust is void, but it's been a looong time since I took Deeds and Trusts. I am not so sure that this is the case in real life. It might be, but some desultory internet research did not answer the question to my satisfaction. But, this case (as well as a smattering of others on the subject) begs the question: Does assigning the note on and on to ultimately be a part of this mbs and that cdo without a corresponding assignment of the trust deed (which I gather was never done in any case) thereby destroy the security interest in the property? If so, well, yeah, sure, someone (who knows who, but someone) is still owed money, but that person is no longer a secured creditor; instead, they are just another unsecured creditor. Now here's where it gets interesting ... suppose I'm right. That means I walk into bankruptcy court and, courtesy of the homestead exemption, I own the FIRST $75k-$150k (depending) of equity in the home, not the last, irrespective of whether the house is underwater, or would otherwise be subject to the claims of the mortgage holder. Interesting thought. Instead of leaving bankruptcy court with just your debts discharged, you leave with your debts discharged and clear ownership of a house that you'll probably have to sell, but you've got dibs on the first $100k or so from the sale. You won't have to sell it if it's worth less than $75k-$150k (depending), but, in California, that's not too likely. Still, you can take your $100k and move to Nebraska and start all over with a house bought with cash.

MisterMousePotato's picture

Here's the thing, from looking at MERS's website, I can see that my note and my deed of trust have taken different paths (Countrywide refinance> MERS> Fannie or Freddie [I forget]> BAC servicing ... the usual). Well, an assumption, I suppose, but a safe one. Anyway, because they have been separated, the current owner of the beneficial interest in the deed of trust is powerless under California law to assign their interest to anyone by virtue of their lack of "ownership of the underlying note," which has been assigned on and on and on and on. So they cannot get their interest in the deed of trust to the owner(s) of the note. Can the owners of the note get their interest(s) back to the owner of the beneficial interest in the deed of trust? And by doing so, even assuming that it is practicable and or possible (I guess we would need Blackrock's and PIMCO's cooperation now, too?), does that somehow 'reassemble' the note/deed relationship? C'mon ... someone's gotta know the answer to this?!?

Careless Whisper's picture

high courts in four states have ruled that mers does not have the right to assign the note. so, when mers has the mortgage and a bank or trust has the note, there is a big problem because mers thinks it can assign the mortgage and note, and it can't (assign the note).


Ripped Chunk's picture

The new unregulated fee game for the banksters: buying delinquint property tax certs. then harassing the obligor with illegal collection actions and piling on fees.

goldsaver's picture

How did you research your mortgage in MERS?

Just_Another_User's picture

When asked to comment on Bove's statements, Jim Rogers said... "Let Mr. Bove buy it!"

fallst's picture

BOA = AIG 2010?


Patsy, Fall Guy, Mark?


Did Paulson pressure Ken Lewis to buy CountryWide?


Ken Lewis is NTS (not that stupid)


So GS would be last man standing?

Timmay's picture

Smoke meet Fire. Fire, Smoke.

frankTHE COIN's picture

This is like The Monty Python Moynihan Hour. Its so hard to say goodbye to yesterday.

Bob's picture

It's like seeing and hearing Nixon saying "I am not a crook" for the first time.  Deja vu, baby. 

But eerily calm in tone, sounds like benzodiazapines. 

Atomizer's picture

How many customers will close their banking account based on the BAC CNBS reporting this morning?


CPL's picture

Watching this all day, and yup, two words did come to mind.


Bank run.

Triggernometry's picture

My account with BAC will be closed by noon.

snowball777's picture

Hey and only two years too late.

centerline's picture

Same thought crossed my mind last night.  If not closing accounts, maybe just pulling some big chunks of cash out - which would still hurt the deposit base.

Jim in MN's picture

So the banks believe that the states will be put firmly under the boot of the Feds and their digipals in New York.

No.....tried to site any interstate transmission lines lately?  Tried to tell states how to license their lawyers, teachers or dogcatchers?

Tried to tell the Supremes that interstate commerce requires them to end centuries of settled state jurisdictional practices?

Yeah.  Write another memo, see if it helps 'resolve' things.

Meanwhile, prepare to take back a world's worth of MBS trash.  That will 'resolve' things too.

John McCloy's picture

William please. When I was 10 years old I watched this mini-series on TV with my father and I could not take a shower for 2 weeks..Why show this now when I am about to go to sleep?

  "We all float down here bitches"

Atomizer's picture

You made my evening complete. Still laughing. Thanks WB7

Spalding_Smailes's picture

Is that Leo ?

Put a set of nutz in his mouth Lol' :-P

williambanzai7's picture

There is no solar power down there ;-)

The Real Fake Economy's picture

lmao!  oh man, i'm in fucking tears crying

fudstampz's picture

a banker in hiding after the collapse, circa 2011

Cammy Le Flage's picture

Cookies.  cookie monster william....   chocolate chip.

Calculated_Risk's picture

I must say, you are on a roll today..

williambanzai7's picture

Tnx everyone, keep your spirits up!

Dollar Bill Hiccup's picture

Wait, isn't that storm drain in Dallas ?!?!?!

Charles Mackay's picture

Don't see this mentioned at ZH today, but REMICs should follow specific rules to be eligible for special tax treatment.  At least 95% of the mortgages held must, to over-simplify, be foreclosable at the present time - if necessary.


The implication of a 'put back' is that the REMIC's securitization is defective, and therefore it follows that 95% of the mortgages may not be foreclosable.  Therefore the REMIC gets only a limited tax break, and the REMICs themselves itself, well, may owe billions in taxes.


I suppose if the mortgages are actually put back and the REMIC liquidated, the taxes may not come due before the Feds show up.  But then again, don't count on it.  So there is some extra incentive for B of A to settle - that is if they have enough capital to settle.



tony bonn's picture

i might hate asshole of america more than golman sucks....i would love to see both squids broken up.

RobotTrader's picture

Now all we need is Meredith Whitney and Nouriel Roubini to come on CNBC in the morning and issue massive downgrades and warnings on the sector.

But that won't happen.

In fact, I'm sure that both are under armed guards as we speak, quarantined from the media.

I stand by my prediction.

Moynihan and Desoer will be gone by Christmas.

Unfortunately, they will both receive lavish exit packages and will never have to work again.

CPL's picture

We have their names and photo's.  Collect names for the new book of the dead.

TemporalFlashback's picture

Is that a post-op picture of Barb?

williambanzai7's picture

These two have never heard the words Banzai7 yet...

Johnny Yuma's picture

WB7, is there any way you could look to morph Brian Moynihan into Roger Lattimer (real name = Bradley Whitford) from Revenge of the Nerds II? They were clearly separated at birth. BofA = greek council? Lol!

fuu's picture

Seven seasons of West Wing as well.

williambanzai7's picture

Yes, I know exactly who you are talking about!

Problem Is's picture

"Moynihan and Desoer will be gone by Christmas."

Yep. Moynihan has that constipated "Will I get my bonus before I am ousted?" look on his face...

Back to you WillB7...

TooBearish's picture

Moy dont have the poker face for this buz - when he lies is just so clear he's sprewing BS and he shows it - gone!

John McCloy's picture

"While that resolution should involve time, effort, and cost, we do not believe it will result in a major long–term disruption to the housing or mortgage markets"

There is the answer you seek for everything that has occured over the past 18 months. Either the banks and the Fed are all fucking crazy and believe these homes will return to their prior levels or they are lying.

  If record low mortgage rates, ZIRP, record stock rally for the time interval on low volume, falling home prices cannot revive a bubble over this time frame then why on earth do they not understand the core of the issue for why it is not occuring.

  • Home prices were entirely too expensive
  • The American economy was finally reaching the service sector pinnacle
  • Record home flippers buying homes at absurd prices with the hopes of passing them off for a quick profit
  • Credit scores were fairly intact and had not undergone the deluge of default we have just seen
  • 10 Trillion dollars was lost in the 2008 collapse..that is decades of savings and it cannot be recreated with ponzi magic. It takes hard work and savings
  • Wall Street was raking in record profits along with the mortgage servicers which were the result of securitizing unicorn assets in an environment that will never occur again so much as the Fed tries. 
  • The jobs are gone permanently and will not exist again until American begins to produce amongst itself and consume amongst itself.

 And in closing why would you want to recreate a scenario rife with fraud the proved unsustainable. Now how are these prices going to return now that we have a record level in Students with massive debt who cannot attain jobs and a shadow inventory that will drive prices down further endangering holders of HELOC loans?

geminiRX's picture

You should do a coast to coast tour about this in Canada. Our population think "it's different here"

CPL's picture

Our fellow countrymen in Canada are a lost cause.  Most look at the exchange rate and make a determination that they are smarter/better than our cousins to the south (worldwide in some cases, goody two shoes horseshit).


Fact is if our cousins sink, we're on the same boat in a different cabin.


Seriously though if you are in a city.  Leave as soon as possible.  Toronto is in big trouble.  Jamacians and the Muslims will burn the place down.  Vancouver, Triads/Tongs and the muslims will burn the place down.  Montreal, Haitians and Muslims will burn the place down.  Winnipeg already is native to the core and it plays a good fiddle but booze is something some cultures should avoid altogether.  It's been running around the same murder rate as DC and highest car theft in the world.  It's a dump.  Well meaning leaders, shitty population.


Move to a place with a well and at least 100km from the city.  Lots of cheap places.  While the Canuck cities will collapse into a shit storm, it won't last for long.  Most of the infrastructure that is working right now is kept running on a shoestring to cover pensions (reason why every second week you hear of "boil water" warnings in practically every major city in Canada).  All it would take is a bad water purification table and the populations will be taken care of because our hospitals act as overflow from the old age homes.


Bright future eh?

bankonzhongguo's picture

Saw an old friend, Yoram (East) Hamizrachi, just passed away when that heavenly body flew by the earth.  (Thanks Canadian health care.) I'd say the Winnipeg community better prepare for a far colder Winter for the next few years.  Time to take Yoram's Otter back up to Churchill to ride this one out.

CPL's picture

I'm sure Yoram will be pleased in spirit.  Churchill is pretty country.  No better place for a fighter to claim home.  The norse gods that walk the place should welcome him to their table in honour regardless of religon.

CPL's picture

And yes even the Ottawa Valley Irish know of Yoram.  He's helped out the Irish before.  I promise to raise a drink and two coppers for the ferryman for him.  My dad met him on occasion.  Mentioned that before he met him he thought he was meeting a Japanese guy..or more specifically "nip".

He was surprised when some tank of a white guy showed up.

Problem Is's picture

"Our fellow countrymen in Canada are a lost cause."

A Constitutional Monarchy and cult of personality over those inbred, idiotic, parasitical Royals will do that...

They'll lay down and take it like Brits taking Bankster imposed austerity...

Come on Quebecers...
Put a stop to that shit...

George Costanza's picture

There is one big difference between now and 2007.  The public is more informed and will not "do nothing" if the bailouts continue. They will vote out the incumbents, and the politicians do care about that.   Messages will be sent in two weeks.  Then again, in two years.
If the government does not get in line... social unrest (see France)

Jim in MN's picture

Bank of America, meet 'shrinkage'.

Shrinkage, meet BoA.

williambanzai7's picture

Yes, now they know that a CDO is not the same as COD.