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The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages

Submitted by Reggie Middleton on 10/19/2010 15:31 -0400

Summary: As the putback parade gets going, the question is not
whether the banks can afford to buy back the mortgages. The question is
“Can the Banks Afford the Instantaneous and Guaranteed HIT to
CAPITAL?” What investors will lend money to see it instantly evaporate,
and how much will they charge for those evaporation services? TARP 3.0
coming to a door step near you!!!

As clearly articulated in detail in The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!, entities are looking to stem losses by putting it to the originating banks and/or servicers. From Bloomberg: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages

Oct. 19 (Bloomberg) — Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York
are seeking to force Bank of America Corp. to repurchase soured
mortgages packaged into $47 billion of bonds by its Countrywide
Financial Corp. unit, people familiar with the matter said. The
bondholders wrote a letter to Bank of America and Bank of New York
Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide
to service the loans properly, their lawyer said yesterday in a
statement that didn’t name the firms.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices
since the 1930s. Last month, BNY Mellon declined to investigate
mortgage files in response to a demand from the bondholder group, which
has since expanded. Countrywide’s servicing failures, including
insufficient record keeping, may open the door for investors to seek
repurchases by bypassing the trustee, said Kathy Patrick,
their lawyer at Gibbs & Bruns LLP. “We now are in a position where
we have to start a clock ticking,” Patrick, who is based in Houston,
said today in a telephone interview.

MetLife Inc.,
the biggest U.S. life insurer, is part of the group represented by
Gibbs & Bruns, said the people, who declined to be identified
because the discussions aren’t public. TCW Group Inc., the manager of
$110 billion in assets, expects to join BlackRock, the world’s largest
money manager, and Pimco, which runs the biggest bond fund, in the
group, the people said.

Countrywide also hasn’t met its
contractual obligations as a servicer because it hasn’t asked for
repurchases itself and is taking too long with foreclosures, either
because of document or process mistakes or because it doesn’t have
enough staff to evaluate borrowers for loan modifications, Patrick said.
If the issues aren’t fixed within 60 days, BNY Mellon should declare
Countrywide in default of its contracts, she said.

Trustee Duties

“The letter states a demand directed to Countrywide to cure the defaults,” said Kevin Heine,
a spokesman for BNY Mellon. “It does not ask BNY Mellon to take any
action. BNY Mellon will continue to perform its duties as trustee.”
Charlotte, North Carolina-based Bank of America will “defend our
shareholders” by disputing any unjustified demands it buy back defective
mortgages, Chief Executive Officer Brian T. Moynihan
said today. Most claims “don’t have the defects that people allege,”
Moynihan said on Bloomberg Television, referring to so-called putbacks,
in which guarantors or investors in mortgage-backed securities ask to
return bad loans. “We end up restoring them, and they go back in the
pools.”

“We continue to review and assess the
letter, and have a number of question about its content, including
whether these investors have standing to bring these claims,” Bank of
America Chief Financial Officer Charles H. Noski said today on a
conference call with analysts. “We continue to believe the servicer is
in compliance with the servicing obligations.”

Well I brought this up in January of 09: Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results

I mentioned again in March (yeah, it started building then as well): Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again) Thursday, March 4th, 2010

And again last week: From The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf
2008!

Now that the Robo-Signing scandals have
achieved full notoriety through the media, it is time to address the
real issues facing investors in bank stocks. We also believe that the
media is staring at the wrong target. Each major media outlet is
copying what is popular or what the next outlet broke as a story
versus where the true economic risks actually lie – which is
essentially the real story and where the meat actually is….

This is the part that everybody seems to be overlooking…

All you really need to do is find the
banks that accepted a lot of broker business, factor in the expense of
the class action suit litigation that is popping up in nearly every
state (try Googling it, you will be amazed as big firms and store front
lawyers alike are throwing their hats in the ring), and you will see
the easiest way out of a potentially tough bind for investors is the
put back. Where does this land? Squarely on the balance sheet of the
banks – who, BTW have the money to attract even more predatory lawyers.
A forensic review of high LTV loans between 2003 and 2007 should find
that at the very least 30% were aggressively valued, with a more
realistic number coming in at about 60%.

That was just one week ago. It looks like the media has read the blog and jumped on the hardcore economic topic at hand!

Okay, so here’s the next topic to discuss in the media.
When (not necessarily if, but when) these assets get put back they are
going to be put back at the nominal purchase price. This is not the
economic market price. THIS will be the end of extend and pretend policy
for the banks. What the legislature and regulators both refused and
could not do (capture, anyone? Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture),
the market will do for them. All of that bank balance sheet work that I
did on the banks over the last three years WILL pay off for 2010/2011,
AGAIN! To those who are not following me, the markdowns plus legal fees
that will accompany 10s of billions of dollars of putback morgtages will
absolutely rip through bank balance sheets. They will probably have to
hit the capital markets hard (and despite ZIRP, the markets may hit
back) and will expect an immediate haircut of ~40% or so on the put back
mortgages, easily! Instant evaporation of shareholder capital. Instant!
The question is not whether the banks can afford to buy back the
mortgages. The question is “Can the Banks Afford the Instantaneous and
Guaranteed HIT to CAPITAL?” What investors will lend money to see it
instantly evaporate, and how much will they charge for those evaporation
services? TARP 3.0 coming to a door step near you!!!

Subscribers (please click here to subscribe): I
suggest that you review the full forensic analysis of all of the big
and regional banks that we have reviewed. They can be accessed from the Subscription Content link. Those who choose not to subscribe can still read my free opinion and content below.

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Tue, 10/19/2010 - 21:28 | 663179 Buck Johnson

I remember back at the start last month that Zerohedge said that this was going to snowball into something bigger and all of them was right. Also Reggie I have a question, when I heard about the buy backs coming from of all institutions the Fed and PIMCO along with the others it shocked me. The Fed and Pimco has to know that B of A doesn't have the money to buy back those bonds. And by allowing themselves to form a beach head, it will make it easier for everyone else on the planet who bought this junk to get their money back. And on top of it all it will force the banks (all of them) to actually price their stuff from mark to make believe to mark to market.

The question is why pull on the tigers tail and/or do something that can literally kill you in the tiger sense but also kill your financial system?

Tue, 10/19/2010 - 22:20 | 663265 tom a taxpayer

Yes, the FRBNY and PIMCO, two members of the TBTF fraternity, turning on BofA, another member of the fraternity, is suspicious. The FRBNY knows the yeoman's work BofA did, willingly and unwillingly, to keep Countrywide, Merrill, etc from sinking Wall Street/Fed/Treasury. Having the FRBNY turn on BofA seems like a mother devouring her child. Something is rotten on Maiden Lane.

Tue, 10/19/2010 - 22:50 | 663243 i-dog

"why pull on the tigers tail and/or do something that can literally kill you in the tiger sense but also kill your financial system?"

The financial system is already dead! It's currently analogous to a controlled demolition where the plunger has already been plunged and we can hear the charges exploding ... we all know the outcome from there.

IMO, the only solution is for everyone to pressure the states to band together and vote to bring down Washington completely. The states are all BK, but they can do what Lincoln did with "greenbacks" and each issue their own notes to attempt to start again.

Washington and Wall Street can not be fixed!

Tue, 10/19/2010 - 20:34 | 663098 bugs_

Wonder if Bill Gross has been loading up on senior BAC debt?

Tue, 10/19/2010 - 20:24 | 663086 boricuadigm-shift

Is it late to head back to FAZ? Good luck with that! :-)

Tue, 10/19/2010 - 19:44 | 663039 whosetosay

So BofA is underwater too???? C'mon in.... the water's fine.

Tue, 10/19/2010 - 18:58 | 662973 Vorpal1

Beware the bias of ascertainment e.g. the anthropic principle. The scientific method is woefully inaccurate with the selective retrospectascope.

Tue, 10/19/2010 - 18:39 | 662882 treasurefish

Is it time to revisit First National Bank of Montgomery vs Jerome Daly?

According to some book called Modern Money Mechanics, the loan originator created money out of thin air by Mr. Daly's signature as a simple entry to their books. When they sold it, they simply moved the amount to other column.

Remember when you got your mortgage? You went to a bank, signed a whole bunch of useless paperwork, and then the note was immediately sold to another (useless) bank. You never made a single payment to the bankster that you sat with for hours and hours. It was your signature that created the money on the note. The money that paid the builder came from the second bank who bought the rights to "service" the loan (like I am about to "service" BAC). Then, it was immediately sold to Wall Street dozens of times, until Fannie Mae became the bag-holder. Right or wrong?

So, considering that you created the money, and the first bank never actually lent any of it's own money, does this mean that this put-back goes back to the person who supplied the signature? My signature is worth a lot money!

Sounds like the right thing to do to me!

If not, then who?

Tue, 10/19/2010 - 18:07 | 662864 Fearless Rick

Maiden Lane, bitchez! The Fed is IN on the windfall about to come streaming out of good old BofA. Couldn't have happened to a nicer bunch of cretins.

They own my father's estate's mortgage (in default, foreclosed, nada since served in March, except for the robo-signed assignment from MERS to BAC dated March 3, 2010, attesting that the assignment was executed? in force? on November 7, 2008 hahahahahahahahaha! Show me the wet ink note and absolute proof, douchebags.). Any guesses how long they'll take to get around to me?

I'm putting it at 10 more months before they motion the action forward. NY state has onerous laws, passed in 2008 and amended in 2009, that make it really tough to foreclose.

Tue, 10/19/2010 - 17:09 | 662696 zero intelligence

With the way they are banging on BofA, I smell another Lehman up ahead -- where JP Morgan asset stripped the corpse for $138 billion of recap money in bankruptcy court.

http://financialsense.com/node/104

Tue, 10/19/2010 - 17:05 | 662675 I am a Man I am...

Taking a vote, who is going to acquire B of A, JPM or Citi??

Tue, 10/19/2010 - 17:35 | 662767 Rainman

Bank of the United States..........while Old Hickory twitches in his grave.

Tue, 10/19/2010 - 16:49 | 662593 californiagirl

Do you think there is any likelihood that the FED will bail out Bank of America with QE2? And maybe all of this was pre-arranged as a smoke-screen to fool the masses?

Tue, 10/19/2010 - 16:39 | 662539 Noah Vail

This suggests to me that because the NY Fed is involved in this, they figure BAC is dead meat in any case, otherwise they wouldna done it.

Tue, 10/19/2010 - 20:33 | 663096 bugs_

They are playing chicken.

Tue, 10/19/2010 - 15:59 | 662404 Hidetora

DefCon ZERO(!) in 5, 4, 3, 2...

Tue, 10/19/2010 - 15:58 | 662398 SheepDog-One

PUT.....ze mortgage....BACK!!

http://www.youtube.com/watch?v=sO3qJGKs9gw

Tue, 10/19/2010 - 16:29 | 662502 Noah Vail

No man, its "gimme me money back."

Tue, 10/19/2010 - 16:06 | 662389 George Washington

Reggie has a right to brag about his track record. He's been right about alot of stuff for years!

So does Karl Denninger.

As I've said repeatedly, Mark Spitz was an idiot when he bragged and then didn't win any gold metals, but he was a hero when he bragged and then won numerous golds in the next olympics.

Reggie, Denninger and others who have done the hard work of poking beneath the hood for years are heros. When they point back to older posts, they deserve credit ... they were YEARS ahead of the mainstream financial press.

Tue, 10/19/2010 - 17:42 | 662787 Pondmaster

GW -

I have to agree , ZH has taken one of the leadership roles in bringing the current fraud to light . I have also followed KD for same length of time as ZH , Kudos to Tyler and Karl .- Yves Smith of Naked Capitalism deserves credit as well , and has not fudgded or budged on truth telling during media spots. Chris Whalen on Krudlow scream show , with Ritholtz . Chris stated Market will bring out and take care of the fraud . Funny , what the banks hid in the darkness , the Gov't from top to bottom refused to acknowledge , and regualtors turned a shoulder too , is coming out into the light , and there is no hiding mark to fantasy anymore . May the fraudsters and guilty parties reap fully what they have sown .

Tue, 10/19/2010 - 16:57 | 662642 A Man without Q...

Yes, he has the right, but we shouldn't forget Yves Smith (Naked Capitalism), Mike Konczal (Rortybomb), Rithholtz, or the hundreds of people who have posted very insightful comments on various blogs. This has demonstrated the amazing power of the internet, to keep people informed when the MSM isn't telling us anything. Maybe 10 or 15 years ago, they could have kept this out of the public domain, like the hid the truth on Enron, but not today.

It is no wonder the power "elite" is terrified by the internet. There is nothing more dangerous than angry citizens who know what is going on and can prove it. Imagine the Contra scandal happening now? Imagine the backdoor bailout of LTCM or the insolvent banks after the Peso crisis.

The internet can change the world because it tells people what they need to know, not what the establishment wants is to think.

Tue, 10/19/2010 - 19:53 | 663046 chopper read

WELL PUT!

Tue, 10/19/2010 - 17:09 | 662694 hooligan2009

I AM SPARTACUS!

Okay im not but I could be!

Tue, 10/19/2010 - 17:08 | 662688 George Washington

Absolutely. Yves Smith and Barry Ritholtz are outstanding.

I haven't read Rortybomb, so I'm ignorant...

The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages

This is the part that everybody seems to be overlooking…

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