There was a time when the announcement of lawsuits against Bank of America for the fraudulent mortgage practices of the worst M&A acquisition of all time - Countrywide Financial - sent the stock of BAC plunging. Now, it has become a daily thing and any incremental news barely cause a budget in the stock. One just needs to look at the surging Reps and Warranties claims against the bank (most recently in the latest Q3 earnings report [9]) for improper mortgage conduct in the past to get a sense that very soon the firm's entire market cap will be less than the liability and litigation reserve it will need to establish against the avalanche of lawsuits we predicted back in October 2010 [10]. The litigation against the bank now is so large, that it will soon have to pull its TBTF get out of bankruptcy card just to avoid being sued to death in a 1000 legal paper cuts. This explains why the just announced latest lawsuit against BAC by the NY District Attorney, seeking $1 billion or so, for fraudulent loan-origination practices barely caused a stir in the stock.
From Bloomberg [11]:
Bank of America Corp. (BAC) was sued by the U.S. attorney in Manhattan for allegedly engaging in a scheme to defraud Fannie Mae and Freddie Mac.
The complaint alleges that Countrywide Financial Corp., which was later bought by Bank of America, implemented a loan- origination process that generated thousands of fraudulent or defective loans that were sold to Fannie Mae and Freddie Mac, according to a statement today from the Manhattan U.S. Attorney’s Office.
This event in itself is not spectacular, or even noteworthy: BAC will eventually settle for pennies on the dollar even as Fannie, Freddie and Bharara all get to say they did their best. What is more notable is that it is precisely the endless continuation of such legal action against BAC and the other banks, that has pushed them away from the mortgage origination business, and why the banks are so very leery of lending money to retail consumers, because they know that sooner or later, the latest bout of cheap crediting will come back to bite them in a court of law.
Implicitly, this development favors such firms as MBIA, who are suing BAC for essentially the same thing, as it weakens BAC's argument that it did nothing wrong, and also is bullish for legacy-liability free mortgage orginators such as Ocwen, who are happy to boldly issue mortgage where none of the legacy banks wish to tread any longer.
The full press release from the DOJ, starting as follows: "After Collapse of Subprime Lending Market in 2007, Countrywide Started Alleged Fraudulent Mortgage Origination Program Called the “Hustle” Designed to Sell Defective Loans to Fannie Mae and Freddie Mac" can be found here [12].
Full lawsuit link here [13].