Bill Black And L. Randall Wray Demand Bank Of America Finally Open It Books
William Black ratchets his campaign for putting an allegely insolvent Bank of America into conservatorship by several notches, following up on Jonathan Weil's argument presented a few days ago that there is massive "book cooking" by Moynahan's henchmen, and that it is about time that BofA truly opens it books for all to evaluate just how undercapitalized the mega bank truly is.
While we welcome Bank of America's response to our two-part essay, "Foreclose on the Foreclosure Fraudsters,"
it does not actually respond to any of the facts or analytical points
we made. Indeed, it does not engage the issues we raised. Bank of
America's response contains some useful data on foreclosures that
supports points we have made in prior articles, but overwhelmingly it is
a plea for sympathy; Bank of America says it is beset by deadbeat
borrowers and it is distressed that it is criticized when it forecloses
on their homes. Bank of America portrays itself as the victim of an
Bank of America Should be Placed in Receivership NOW
We argued that the FDIC should place Bank of America in receivership
and the federal banking agencies should impose a moratorium on
foreclosures until the mortgage servicers correct their systems, which
currently often rely on massive fraud and perjury. There can be no
assurance that foreclosures are lawful until the banks actually find the
mortgage "wet ink" notes signed by debtors to prove they are the true
beneficial owner of the mortgage debts, which is required to seize
property. We also called on the banks to identify and compensate
homeowners who were fraudulently induced to borrow by the lenders and
their agents through a number of fraudulent practices variously marketed
by lenders as "no doc", liar, and NINJA loans (all subspecies of what
the industry aptly called "liar's" loans).
We showed that outside studies by a wide range of parties showed massive fraud by the bank.
The demands by investors that Bank of America repurchase loans and
securities sold under false "reps and warranties" may cause exceptional
losses if those making the demands document the broader fraud by the
lenders. The article
"Bank of America Resists Rebuying Bad Loans" shows that Bank of
America's potential loss exposure to Fannie and Freddie is staggering:
"[Bank of America] said it sold $1.2 trillion in loans to the
government-controlled housing giants from 2004 to 2008 and has thus far
received $18 billion in repurchase claims on those loans."
The company is fighting the groups that are demanding that it repurchase the toxic mortgages. Its CEO, Brian Moynihan counters their claims with the following analogy:
Such investors are like "people who come back and say,
'I bought a Chevy Vega, but I want it to be a Mercedes with a
12-cylinder [engine],'" Mr. Moynihan said in October. "We're not putting
up with that."
One-third of its subprime business is in default and Mr. Moynihan
thinks Countrywide was selling Vegas? If one third of Vegas crashed and
burned within three years of being purchased the metaphor might be apt
and completely incriminating. We argued that putting Bank of America
into receivership is the proper remedy for its substantial violations of
the law and for its continuing reliance on unsafe and unsound
practices. Outside reviews have documented the most extensive and
financially harmful violations of law and unsafe banking practices and
conditions in history.
As argued in a recent article by Jonathon Weil, the bank is nearing a
"tipping point" as markets recognize it is "cooking the books," vastly
overstating the value of its assets as it refuses to recognize the true
scale of losses on its purchase of Countrywide. Ironically, it still
carries on its books $4.4 billion of fictional "goodwill" value created
by overpaying for Countrywide (a notorious control fraud), as well as
$142 billion of home equity loans that are worth far less. A more honest
accounting of "good will" and of the value of home equity loans would
take a big bite out of Bank of America's market capitalization ($116
billion), which has lost 41 percent
of its value since April 15. The markets are moving ever closer to
shutting down the institution, but Moynihan is not "putting up with" the
demand by investors for Bank of America to come clean on its fraudulent
Ms. Mairone's Response Verifies Our Claims
Rebecca Mairone replied on behalf of Bank of America to our two-part
post. Step back for a moment and consider the context of Bank of
America's response. We cite evidence that the bank has committed
massive fraud, explain that this provides a legal basis for placing it
in receivership, and call on the FDIC to do so. Bank of America chooses
to respond publicly, but its response never contests its massive fraud
or our demonstration that there is a legal basis for placing it in
Instead, Bank of America complains that we "do nothing to illuminate
the challenges [BofA's home mortgagees] face." This is not our task;
nevertheless, the claim is incorrect. We illuminate the problems posed
by the fact that nonprime borrowers were frequently victims of mortgage
fraud perpetrated by lenders as well as many other operatives in the
unprecedented criminal lending and securities fraud of the past decade.
This problem is typically ignored -- at least by the financial sector
and the mainstream media -- so we did "illuminate" the problem and the
cause of action borrowers could bring for "fraud in the inducement."
We showed that the fraudulent senior officers that controlled home
mortgage lenders created "liars," and NINJA loan programs designed to
induce millions of Americans to take out loans they could not afford to
repay. The endemic underlying fraud in the origination and sale of
nonprime loans is critical to understanding why loan defaults are
massive, why borrowers were typically the victims of the fraud and lost
their meager savings due to the frauds, why loan modifications typically
fail, and why foreclosure fraud has been so common. The endemic fraud
also hyper-inflated the bubble and helped cause the economic crisis and
severe loss of employment. Over a million Bank of America borrowers
face these "challenges" that we "illuminated."
Bank of America's response is guilty of what it criticizes; it
ignores the fraud by nonprime lenders and sellers, particularly Bank of
America's frauds in both capacities. It does not seek to "illuminate"
the frauds or the problems that arise from endemic mortgage fraud. We
did not invent the "epidemic" of mortgage fraud. The FBI began
testifying about that in 2004. The FBI predicted that it would cause a
"crisis" if it were not stopped -- and no one claims it was stopped.
The mortgage industry's own fraud experts opined publicly in 2006 that
the type of loans that Countrywide decided to elevate to its favored
product was an "open invitation to fraudsters" and fully deserved the
phrase that the lenders used to describe the product: "liars' loans".
(Bank of America chose to purchase Countrywide at a time when it was
notorious for the awful quality of its mortgage loans.) It is the
lenders and their agents, the loan brokers, that directed the lies in
these liar's loans and appraisals and it was the lenders that made
fraudulent "reps and warranties" in order to sell the fraudulent loans
on to others in the form of securities. Economists and white-collar
criminologists share a belief in "revealed preferences." The senior
officers that control lenders provide an "open invitation to fraudsters"
in the midst of an "epidemic" of fraud because they intend to profit
from those frauds.
Instead of contesting its issuance and sale of massive numbers of
fraudulent loans, Bank of America writes to provide data on
delinquencies and foreclosures in support of its claim that it is the
victim of Countrywide's deadbeat borrowers who it tries in vain to help.
Bank of America's data, however, add support for the evidence of
widespread mortgage fraud, particularly by Countrywide. Accounting
control frauds maximize their (fictional) reported income by lending
routinely to those who cannot afford to repay their loans. It is this
aspect of the fraud scheme that is most counter-intuitive to those that
do not study fraud, but to criminologists it provides the most
distinctive markers of fraud. The senior officers that control
fraudulent lenders maximize the bank's reported short-term income, in
order to maximize their compensation, by growing extremely rapidly
through making loans at a premium yield. This strategy creates a "sure
thing" (Akerlof & Romer 1993). The lender is sure to report record
(fictional) profits in the short term and suffer enormous (real) losses
in the longer term.
The Evidence Supports Our Claims of Fraud
If we are correct that Countrywide operated as a fraud we would expect to find the following:
- disproportionately large rates of loan delinquencies and defaults
- huge losses upon default, and
- fraudulent representations and appraisals.
We would also predict widespread fraud in the "reps and warranties"
that Countrywide and Bank of America provided to purchasers of nonprime
loans originated by Countrywide. As we emphasized in our initial posts,
a wide range of financial entities have confirmed the widespread fraud
in the reps and warranties. This is why Bank of America is being sued.
The data they provided in its response to our blogs supports the first
First, Bank of America admits to a 14 percent delinquency rate on its
mortgages. That percentage is roughly seven times greater than the
normal delinquency rate for prime loans. It is roughly three times the
traditional rule of thumb for a fatal delinquency rate (5 percent) for a
home lender. Losses upon default during this crisis are dramatically
greater than the historic percentages, and loss reserves were at
historic lows, so the traditional rule of thumb for fatal losses is
unduly optimistic in this crisis.
Second, Bank of America's response states that Countrywide-originated
loans have caused 85 percent of total delinquencies. Bank of America
was a massive mortgage lender before it acquired Countrywide, so taken
together these data suggest that the delinquency/foreclosure rate for
Countrywide-originated mortgages must have been well over 20 percent --
over ten times the normal delinquency rate and four times the
traditional rule of thumb for fatal losses. These exceptionally large
rates of horrible loans, defaulting so quickly after origination, are a
powerful indicator that Countrywide was engaged in accounting control
fraud. Unfortunately, lenders that specialized in making nonprime loans
were typically fraudulent. The result was a massive bubble and economic
Our conclusions are well-supported by many other analyses, many of which were conducted long ago. For example, Reuters reported in January 2008 that one-third of Countrywide's subprime mortgages were already delinquent:
(Reuters) - Countrywide Financial Corp CFC.N, the
largest U.S. mortgage lender, on Tuesday said more than one in three
subprime mortgages were delinquent at year-end in the $1.48 billion
portfolio of home loans it services.
Countrywide said borrowers were delinquent on 33.64 percent of
subprime loans it serviced as of December 31, up from 29.08 percent in
Foreclosures are now vastly more common and the losses lenders suffer
upon foreclosure, particularly for nonprime loans, are catastrophic.
For example, Bloomberg reported at the end of 2009 that foreclosures result in losses amounting to nearly three-fourths of the value of the loan:
For subprime loans, losses averaged 73 percent for a
foreclosure compared with 59 percent for a short sale, Amherst
[Securities Group LP] reported.
Third, Bank of America's data indicate another form of deceit that is
a typical consequence of accounting control fraud. Bank of America has
delayed foreclosing, sometimes for years, on large numbers of loans
that have no realistic chance of being brought current, even with the
loan modifications it offered. This behavior would be irrational for an
honest lender, for it would increase ultimate losses, but is a typical
strategy for a lender controlled by fraudulent senior officers because
it greatly delays loss recognition and allows them to extend their
looting of the bank for years through bonuses paid on the basis of
fictional reported "profits" after the bank has (in economic substance)
failed. Bank of America's response to us admit that, of their 1.3
million customers who are more than 60-days delinquent, 195,000 have not
made a payment in two years. Of those loans which have not received a
payment in two years, 56,000 are already vacant.
For the foreclosure sales in the period from Jul-Sep, 2010:
- 80 percent of borrowers had not made a mortgage payment for more than one year
- Average of 560 days in delinquent status (approximately 18 months)
- 33 percent of properties were vacant
The traditional rule of thumb is that a home loses 1.5 percent of its
value each month it is delinquent but not foreclosed and sold. Those
losses are far greater when the property is vacant. The loss of value
is not limited to the particular home; all homes in the neighborhood are
harmed when homes are left vacant for long periods. Bank of America
does not address this issue, but the time from foreclosure to sale has
also grown dramatically, which means that the length of time that
foreclosed homes remain vacant prior to sale has grown substantially.
The industry calls this huge number of homes, which are not producing
income to the lenders because of the extraordinary growth in
delinquencies and the delay in sales even after foreclosure, the "shadow
inventory." Note that none of the government foreclosure relief
programs mandated that Bank of America sit on these delinquent assets
for an average of 18 months and allow them to be wasting assets.
The bank's response primarily criticizes its borrowers as deadbeats,
yet the data it provides support points we have made in our prior posts,
including Bill Black's posts about the banks working with the Chamber
of Commerce and Chairman Bernanke to extort the Financial Accounting
Standards Board (FASB) in order to destroy the integrity of the
accounting rules requiring banks to recognize losses on their bad loans.
We have explained why the fraudulent officers controlling many lenders
followed a strategy of making bad loans at premium yields in order to
maximize (fictional) accounting income and their bonuses. This dynamic
drove the current crisis. These frauds hyper-inflated the housing bubble
and caused trillions of dollars of losses.
The extortion of FASB was successful; Bank of America was one of the
leaders of that extortion. It changed the accounting rules so that banks
could often avoid recognizing losses on these fraudulent loans, until
they actually sold the home taken back through foreclosure. This
dishonorable accounting fiction creates perverse incentives for banks to
do exactly what Bank of America has done -- let bad assets waste away and make already severe losses catastrophic.
We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first two-part
post called on the U.S. to begin "foreclosing on the foreclosure
fraudsters." We concentrated on how the underlying epidemic of mortgage
fraud by lenders inevitably produced endemic foreclosure fraud. We wrote
to urge government policymakers to get Bank of America and other
lenders and servicers to clean up the massive fraud. We obviously
cannot rely solely on Bank of America assessing its own culpability.
Note also that while we have supported a moratorium on foreclosures,
this is only to stop the foreclosure frauds -- the illegal seizure of
homes by fraudulent means. We do not suppose that financial institutions
can afford to maintain toxic assets on their books. The experience of
the thrift crisis of the 1980s demonstrates the inherent problems
created by forbearance in the case of institutions that are run as
control frauds. All of the incentives of a control fraud bank are
worsened with forbearance. Our posts on the Prompt Corrective Action
(PCA) law (which mandates that the regulators place insolvent banks in
receivership) have focused on the banks' failure to foreclose as a
deliberate strategy to avoid recognizing their massive losses in order
to escape receivership and to allow their managers to further loot the
banks through huge bonuses based on fictional income (which ignores real
losses). We have previously noted the massive rise in the "shadow inventory" of loans that have received no payments for years, yet have not led to foreclosure:
As of September, banks owned nearly a million homes, up 21
percent from a year earlier. That alone would take 17 months to unload
at the most recent pace of sales, and doesn't include the 5.2 million
homes still in the foreclosure process or those whose owners have
already missed at least two payments.
Bank of America's response admits how massive its contribution to the
shadow inventory has been. Mairone implies that the bank delays its
foreclosures for years out of a desire to help homeowners, but common
sense, and their own data show that the explanation that makes most
sense is that the bank is hiding losses and maximizing the senior
officers' bonuses by postponing the day that the bank is finally put
We did not call for a long-term foreclosure moratorium. Our proposal
created an incentive for honest lenders to clean up their act quickly
by eliminating foreclosure fraud. We will devote a future post to our
proposals for dealing with the millions of homes that the fraudulent
lenders induced borrowers to purchase even though they could not afford
to repay the loans.
Bank of America's data add to our argument that hundreds of thousands
of its customers were induced by their lenders to purchase homes they
could not afford. The overwhelming bulk of the lender fraud at Bank of
America probably did come from Countrywide, which was already infamous
for its toxic loans at the time that Bank of America chose to acquire it
(and also most of Countrywide's managers who had perpetrated the
frauds). The data also support our position that fraudulent lenders are
delaying foreclosures and the sales of foreclosed homes primarily in
order to delay enormous loss recognition.
The fraud scheme inherently strips homeowners of their life savings
and finally their homes. It is inevitable that the homeowners would
become delinquent; that was the inherent consequence of inducing those
who could not repay their loans to borrow large sums and purchase homes
at grossly inflated prices supported by fraudulent inflated appraisals.
This was not an accident, but rather the product of those who designed
the "exploding rate" mortgages. Those mortgages' initial "teaser rates"
induce unsophisticated borrowers to purchase homes whose values were
inflated by appraisal fraud (which is generated by the lenders and their
agents) and those initial teaser rates delay the inevitable defaults
(allowing the banks' senior managers to obtain massive bonuses for many
years based on the fictional income). Soon after the bubble stalls,
however, the interest rate the purchasers must pay explodes and the
inevitable wave of defaults strikes. Delinquency, default, foreclosure,
and the destruction of entire neighborhoods are the four horsemen that
always ride together to wreak havoc in the wake of epidemics of mortgage
fraud by lenders.
Out of these millions of fraudulent mortgages, Bank of America claims
to have modified 700,000; of these, 85,000 are under HAMP. Still, the
Treasury says that the bank has another 375,000 mortgages that already
meet HAMP terms. In other words, Bank of America has been shockingly
negligent in its efforts to modify mortgages. The Treasury reports that
the bank's performance is far worse than that of the other large banks.
Alternatively, Treasury could be wrong about the mortgages; Bank of
America may be refusing to modify mortgages for homeowners who appear to
qualify for the HAMP terms because it knows the data Treasury relied
upon is false. Their unusually low rate of HAMP modifications could be
the result of the extraordinarily high rate of mortgage fraud at
Bank of America has admitted that HAMP's "implicit" purpose is to
help the banks that made the fraudulent loans -- not the borrowers. That
goal was the same goal underlying the decision to extort FASB to
gimmick the accounting rules -- delaying loss recognition. For example,
as reported by Jon Prior
BofA Merrill Lynch analysts said critics of the
program aren't yet vindicated on their calls that HAMP is a failure.
"While the increased re-default rates will provide more 'fodder to those
in the camp' that regards HAMP as a failure, we do not think the story
is so simple," according to the report. The analysts said the revised
re-default rates are in line with what they expected. While the
"explicit goal" of HAMP to help 3m to 4m homeowners "appears
unattainable at this point," its "implicit goal" to stall the
foreclosure process and provide some order to the flow of properties
into REO status has been achieved, according to the report. "In our
view, the implicit goal has been one of the key reasons for the
stabilization in home prices," according to the BofA Merrill Lynch
HAMP's parallel goal is funneling more money to the banks that
induced the fraudulent loans. Data indicate that neither the HAMP
modifications nor those undertaken independently by the banks actually
benefit homeowners. Most debtors eventually default even on the modified
mortgage and end up in foreclosure. Further, many reports indicate that
banks encourage homeowners to miss payments so that they can qualify
for HAMP, then use the delinquencies as an excuse to evict homeowners.
Most importantly, as we reported, half of all homeowners are already
underwater in their mortgages, or nearly so. Bank of America
representative Rebecca Mairone does not report how many of these
mortgages undergoing mods are underwater, but given the massive lender
fraud that included overvaluation during the property appraisal process
(in other words, even before property values fell these mortgages were
probably underwater), it is likely that most are. Since the modification
merely lowers the monthly payment but leaves the balance unchanged, the
homeowners remain underwater. What this means is that homeowners are
left with a terrible investment, paying a mortgage that is far larger
than the value of the home. Because most modifications will lead to
eventual default, all they do is to allow the bank to squeeze more life
savings out of the homeowner before taking the home. Bank of America
wants to be congratulated for such activity.
Meanwhile, Bank of America expects to receive billions of dollars for
its participation in HAMP. The top three banks (JPMorgan Chase and
Wells Fargo being the others) will share $17 billion because HAMP pays
servicers, investors and lenders for restructuring. These top 3 banks
service $5.4 trillion in mortgages, or half of all outstanding home
mortgage loans. Yet, as Phyllis Caldwell, Treasury's housing rescue
chief has testified, there is no proof that these banks have any legal
title to the loans they are modifying and foreclosing. In Bank of
America representative Rebecca Mairone's response to us, she does not
respond to, let alone contest, the fact that her bank, as well as other
banks, has been illegally foreclosing on properties -- illegally
removing people from their homes. Instead, she lists characteristics of
those homeowners on which Bank of America might be illegally
foreclosing: they are unemployed, they have not made payments in many
months, a third no longer occupy their homes, and so on. It is
interesting that she completely ignores all the important issues at hand
with respect to the "deadbeat" homeowners. How many of these homeowners
were illegally removed from their homes so that they became vacant?
Does Bank of America hold the "wet ink" notes on any of these homes,
as required by 45 states? How many of these homeowners were unemployed
or otherwise financially distressed when the loans were originally made?
How many of the mortgages were fraudulent from the very beginning: low
docs, no docs, liar loans, NINJA's (all specialties of Countrywide)?
Without addressing these questions, Bank of America cannot claim to have
demonstrated that the foreclosures were appropriate, no matter how many
years borrowers might have been delinquent.
Unfortunately, the non-response to the crises caused by Bank of
America's frauds exemplifies their response to our reporting. It does
not engage the points we made. It is a pure PR exercise. Bank of
America also wants praise for having "stepped up" to purchase
Countrywide, and asserts that if it had not done so, the "failure of
[Countrywide] would have been devastating to the economy, the markets,
and millions of homeowners." We have explained why this was not true of
Countrywide or Bank of America. Receiverships of fraudulent banks
preserve, not destroy, assets. Countrywide and its fellow fraudulent
lenders and sellers of toxic mortgages "devastat[ed] the economy, the
markets, and millions of homeowners," as Citicorp's response put it. A
receiver would have fired Countrywide's fraudulent senior leaders. Bank
of America, by contrast, put them in leadership roles in major
operations, including foreclosures, where they could commit continuing
Bank of America did not purchase Countrywide for the good of the
public. It purchased a notorious lender to feed the ego of their CEO,
who wanted to run the biggest bank in America rather than the best bank
in America. They certainly knew at the time of the purchase that is was
buying an institution whose business model was based on fraud, and it
had to have known that a substantial portion of Countrywide's assets
were toxic and fraudulent (since Bank of America's own balance sheet
contained similar assets and it could reasonably expect that
Countrywide's own standards were even worse). The response does not
contest the depth of the bank's insolvency problems should it be
required to recognize its liability for losses caused by its frauds.
Here is how current CEO explained the decision to acquire Countrywide:
The Countrywide acquisition has positioned the bank in the
mortgage business on a scale it had not previously achieved. There have
been losses, and lawsuits, from the legacy Countrywide operation, but we
are looking forward. We acquired the best mortgage servicing platform
in the country, and a terrific sales force.
Bank of America's response to our articles ignores its foreclosure
fraud, which we detailed in our articles. News reports claim that the
bank sent a 60 person "due diligence" team into Countrywide for at least
four weeks. The Countrywide sales staff were notorious, having prompted
multiple fraud investigations by the SEC and various State attorneys
general. The SEC fraud complaint against Countrywide emphasized the
games it played with the computer system. Countrywide had a terrible
reputation for its nonprime lending. Nonprime loans were already
collapsing at the time of the due diligence, the FBI had warned about
the epidemic of mortgage fraud, and the lending profession's anti-fraud
firm had warned that liar's loans were endemically fraudulent. Is it
really possible that Bank of America's due diligence team missed all of
this and that the CEO thought even months later that the Countrywide
lending personnel and Countrywide's computer systems were exceptionally
The obvious questions we have for Bank of America about the due diligence are:
How did you determine the losses in Countrywide's assets?
- How large were the market value losses at that time?
- How large are the market value losses now?
- Which members of the due diligence team were assigned to determine
the incidence of fraud in various loan categories? What did they find?
- What actions did BofA take in response to finding the incidence of mortgage and accounting/securities fraud?
Even Bank of America now acknowledges that Countrywide's computer system and personnel were defective:
After buying Countrywide, Bank of America decided to
adopt the Calabasas, Calif., company's homegrown mortgage-servicing
technology. For more than a year, though, the combined company used two
core systems that didn't communicate with each other. The company's
resources were strained by the integration, the need to roll out new
loan-modification programs and rising delinquencies. "We knew it would
be challenging," says one executive involved in the integration. Bank of
America soon discovered that information was missing from many
Countrywide loan files, making it more difficult to communicate
effectively with borrowers. "You would shake your head and say: How can
that be?" this executive says.
It didn't help that many Countrywide executives were let go during
the integration, with Bank of America installing its own employees in
key posts. Such moves are routine in corporate acquisitions. Former
Countrywide executives ran the servicing operation until recently, says
Dan Frahm, a company spokesman.
Bank of America says no home-loan servicer could have
anticipated the crushing workload caused by economic turmoil, falling
home prices and the foreclosure epidemic. The bank did its "best" in
"difficult and an unforeseen set of circumstances," says Mr. Mahoney,
the head of public policy.
We explained in our initial posts
why accounting control frauds typically have very poor record keeping.
They are wrong to claim that no "servicer" could anticipate that making
fraudulent loans would cause severe losses. Countrywide was perfectly
poised to know how extensive fraud was in nonprime lending and the sale
of nonprime paper. Indeed, its CEO predicted disaster.
Bank of America's computer problems aligned with its senior officers' interest in hiding its losses, as reported by Michael Powell:
The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times
in collaboration with two real estate agents, the bank's system
repeatedly asked for and lost the same information and generated
inaccurate responses. In half a dozen more cases examined by The New York Times,
Bank of America rejected short sale offers, foreclosed and auctioned
off houses at lower prices. But less obvious financial incentives can
push toward a foreclosure rather than a short sale. Servicers can reap
high fees from foreclosures. And lenders can try to collect on private
mortgage insurance. Some advocates and real estate agents also point to
an April 2009 regulatory change in an obscure federal accounting law.
The change, in effect, allowed banks to foreclose on a home without
having to write down a loss until that home was sold. By contrast, if a
bank agrees to a short sale, it must mark the loss immediately.
Any competent due diligence team would have seen obvious warning
signs within hours of entering Countrywide's offices. Countrywide
openly violated the law on record keeping with impunity. Gretchen
Morgenson reported on such practices on August 26, 2007:
Independent brokers who have worked with Countrywide
also say the company does not provide records of their compensation to
the Internal Revenue Service on a Form 1099, as the law requires. These
brokers say that all other home lenders they have worked with submitted
1099s disclosing income earned from their associations. One broker who
worked with Countrywide for seven years said she never got a 1099. "When
I got ready to do my first year's taxes I had received 1099s from
everybody but Countrywide," she said. "I called my rep and he said,
'We're too big. There's too many. We don't do it.' " A different broker
supplied an e-mail message from a Countrywide official stating that it
was not company practice to submit 1099s. It is unclear why Countrywide
apparently chooses not to provide the documents. More than 85% of the
bank's 1.3 million mortgage customers now at least 60 days behind on
their payments got their loans through Countrywide. The $4 billion deal
also saddled Bank of America with technology problems, paperwork
glitches and cultural tension. The servicing unit now has its fourth
leader in roughly two years.
Is it too much to expect of Bank of America's due diligence team that it might have looked at publicly available reports?
As we explained, fraud begets fraud. Bank of America created over $4
billion in "goodwill" and placed it on its books as an asset when it
paid money to acquire Countrywide at a time when it was deeply insolvent
on a market value basis. Instead of acquiring an asset, they got
thousands of fraudulent employees and officers, a failed computer system
and catastrophic losses. So, we have a question for Bank of America,
its auditors, and the SEC: why haven't you written off that entire
Given the fact that we have obtained B of A's attention (and that of
the some administration officials), we ask the following questions that
the public needs to make intelligent policy decisions.
- Has Bank of America conducted a review of
the bank's assets that AMBAC reviewed and found a 97 percent rate of
false reps and warranties?
- If so, who conducted the review, and what rate of false reps
and warranties did they find? Does Bank of America agree that liar's
loans have extremely high fraud rates?
- Does Bank of America agree that an honest secured lender would never seek to inflate an appraisal?
- Does Bank of America agree that a competent, honest secured
lender would prevent others from frequently inflating appraised values?
- Does Bank of America agree that appropriate home mortgage
underwriting can minimize adverse selection and produce a positive
expected value to home lending?
- How many fraudulent mortgage loans made by Countrywide has Bank of America identified?
- What is Bank of America's procedure when it finds suspicious evidence of a fraudulent loan?
- How many fraudulent mortgage loans, by year, since 2000, have Countrywide and Bank of America identified.
- How many suspicious activity reports (SARs) did Bank of
America file concerning mortgage fraud, by year, for the period 2000-to
date? What are the position titles of the three most senior Bank of
America managers that were a subject of the SARs filed by the bank?
- How many SARs did Countrywide file, by year, for the period 2000 on?
- How many mortgage loans or securities did Countrywide and Bank of America sell under false reps and warranties?
- What was the allowance for loan and lease losses (ALLL)
(aggregate amount and relevant ratios) provided by Countrywide and by
Bank of America, each year from 2000 on for mortgages and mortgage
securities? If it varied by type of mortgage provide the ALLL for each
- Which years does Bank of America consider Countrywide's ALLL to be adequate?
- Has Bank of America reviewed Countrywide's nonprime loans for
fraud incidence, fraud losses, and the incidence of lender fraud and
fraud by the lender's agents? Please provide the results.
- What has Bank of America done to remedy the injuries
that borrowers suffered through loan or foreclosure fraud by them or
- Does Bank of America agree that Countrywide's nonprime lending was often conducted in a manner that was unsafe and unsound?
- Does Bank of America agree that Countrywide's record keeping was not adequate and required substantial improvement?
- At current market value of its assets, just how insolvent is Bank of America
- How much can the bank sell its toxic assets for in today's market?
- What is the value of mortgages and mortgage backed securities held by Bank of America for which it has no clear title?
- How many MBSs has the bank sold to investors for which it does not hold the notes that are required?
- What is the bank's current estimate of losses it will suffer in court due to lawsuits by investors?
- The top four banks are holding434 billion in second liens
(good only if the first lien -- the mortgage -- is paid), and carrying
these on their books at 90% of face value. What are Bank of America's
reasonably expected losses on second liens against properties that are
delinquent, in foreclosure, or likely to go into foreclosure?
- How large a sample of subprime and liar's loans did BofA's due diligence team review?
- What likely mortgage fraud incidence did BofA's due diligence
team discover? What did they report to BofA with regard to fraud
incidence? What changes in lending and personnel did BofA implement in
response to these findings?
- Bank of America has not responded to
Bill Black's prior requests that it terminate the services of its openly
racist chief advisor in Germany: Hans-Olaf Henkel. We request a