Tuesday, 19 October 2010 15:28

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

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 , 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

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.

  1. JP Morgan’s Analysts Agree with BoomBustBlog Research on the State of JPM (a Year Too Late) but Contradict CEO Jamie Dimon’s Conference Call Statements
  2. JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!!
  3. 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!
  1. A Must Read: An Independent Look into JP Morgan. This contains the “public preview” document (JPM Public Excerpt of Forensic Analysis SubscriptionJPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download.

  2. File Icon JPM Report (Subscription-only) Final – Professional

  3. File Icon JPM Forensic Report (Subscription-only) Final- Retail

Last modified on Tuesday, 19 October 2010 15:28


  • Comment Link Ted K Wednesday, 20 October 2010 22:31 posted by Ted K

    Hey Mr Middleton,
    I don't have anything deep to say, just want to say I enjoy your work. One thing that has amazed me through all the surreal things of the last 2--3 years is how many well respected and intelligent guys still invest and recommend banks. Names like John Hempton, Bruce Berkowitz, and that John Pualson dude of Paulson's Holdings top two Holdings were Citigroup and BofA (although something tells me he might be adjusting those now). Is it not amazing??? I mean Hempton was one of the first to notice the Repo 105 crap and then he buys a chunk of BofA?!?!?! If that does not prove we are living in weird times Mr. Middleton (can I call you Reggie??) I don't know what does. And Mr Berkowitz comes from the correct stock (Nice Irish name eh??) ;-) to know better than to invest in companies that keep joke balance sheets that give no true pictures of asset values. Anyway I am a cheap SOB and I gotta grab the "Reggie's free stuff". But I really like your info and the way you present it.

    PS. I don't care your educational background etc. I went to a relatively small state University and only got my bachelor's but I think I'm smarter than some of these guys. But I am CURIOUS as hell. Take care Mr. Middleton.

  • Comment Link Jim Wednesday, 20 October 2010 11:42 posted by Jim

    I'm not sure how Mr. Ryskamp makes his money, but I find it hard to believe that the lawyers are going to get to court (or out) any time soon. In my business (history), we look for the building pressure and the weak links. If I'm understanding all the hot analysis above, no one wants to own the homes because the value has evaporated. The titles are increasingly aggregating in the hands of a couple of big banks, and that paper increasingly is being purchased by GFE's under the guise of QE.

    As an historian, the Obama administration finally is getting that there are only a few ways to make the liabilities disappear: sinking dollar or bankruptcy. If GFE's own the crap, then concentrating them in Fannie and Freddie has bought time for smart investors to exit before the government takes bankruptcy, assuaging the market of supposed moral risk. QE now will not be sterilized. The Treasury will print money and buy federal paper, perhaps in new denominations (think: 20-year bonds). The states, retirement funds, and money markets will have to help eat the loss on both accounts. In other words, old white people and doctors and lawyers are going to have to help pay for this - not just workers and poor folk.

    Obama has this figured out and will take retirement in two years. Expect him to pull the bankruptcy in 2Q2012 as Bush did in 4Q2008. He has read his Bible and knows that the debts die on the cross. The corporation is a legal entity, and the banks that are left can fight the investors for 10 cents on the dollar in foreclosures for the real estate. Obama is doing this for the glory and will take a well-paid retirement soon. The question is whether the banks have the liquidity and lawyers to outplay the big investors, like PIMCO and money markets, when the tidal wave hits their books. Who do you think will float in 2011, Reggie?

  • Comment Link Reggie Middleton Wednesday, 20 October 2010 10:37 posted by Reggie Middleton

    Damn, that was good. Fact is indeed stranger than fiction, isn't it? I'm sorry I took so long to read it. Email me at reggie at Boombustblog.com. I would like to out this together in a more concrete fashion, wherein I plug some big names and situations in to see if they fit.

  • Comment Link dlaw Tuesday, 19 October 2010 20:04 posted by dlaw


    Thanks for your work.

    Aren't you actually UNDER-selling the crisis here?

    Let's look at the story again: aren't PIMCO, Blackrock and the FRBNY asserting SERVICER liability here? In essence, CountryWide is behaving like a servicer who refuses to collect mortgage checks - except in this case they're refusing to service the loans by "refusing" to foreclose on these properties with valid documents.

    As an illustrative counter-factual, let's consider how a bank would behave if it had a lot of loans to be serviced that COULDN'T be serviced - I mean, there's no real borrower, there's no house, the loan has been sold more than once, the loan documents are all signed by "Mickey Mouse", etc.. (You know, standard operating procedure in 2005).

    First things first, if I'm a servicer of unserviceable loans, I am going to find a way to "refi" as many of those loans as practicable (and thus generate all-new paperwork) without actually reworking the terms very much. After all, doing "re-fis" in order to kick the default can down the road is old hat for me.

    Sounds like the counter-factual matches reality so far.

    So if I'm that servicer, what do I do if I actually have to foreclose? I can't possibly risk sending this garbage into a court the way I would a normal foreclosure, so I wait. A year goes by, two years, maybe even three or four years without a payment. I present the court with scores of default notices and no response (because Mickey Mouse can't write). AND, I don't present the judge with just a few loans. No, I BURY the judge in foreclosures. The judge is now doing so many foreclosures on loans two and three years without a single payment that shealmost gets to the point of "robo-signing" foreclosure judgments herself. Occasionally I make a mistake and somebody challenges on one of these zombie loans. The judge actually takes time to examine the paperwork and goes nuts, but this is just a small (but growing) percentage of my foreclosures. Dead people and illegal immigrants who "buy" their houses from the subprime Mafia don't ask many questions.

    Again, this counter-factual looks strangely familiar.

    But what do I do on the investor side? That's much trickier. If I'm dealing with Fannie and Freddie, there's probably not much I can do to the loan pools as they generally demand a pretty straightforward pass-through, (even with the Alt-A garbage WaMu and CountryWide dumped on them. Fortunately, those loans are probably a little better, and also fortunately the GSEs are not eager to cause a lot of foreclosures, so I can delay quite a bit. But basically if the GSEs bitch, I quietly take some putbacks. Again, this is what we're seeing.

    Then we come to the private RMBS. At this level, if I'm a servicer of unserviceable loans, I start to engage in hijinks. The simplest, easiest thing to do is, again, to just let the loans go into default for a REALLY long time. By this time, the lower-tranche buyers of the pools I'm servicing are all speculators and they have no time or money to examine things like why the foreclosures are recovering only a tiny fraction of par. Here is a place where we can test the counter-factual against reality, because this would show up in breakdowns of the recovery data. Also, "first loss" tranches would, I guess, start to be wound up - or is that true?

    The real problem comes when I start getting into the tranches where big investors with deep pockets (like PIMCO) will start asking loan-level questions. I can't just stick these guys with horrendous losses on foreclosures all at once or they are going to go mental. Again, the first, best thing to do is delay, delay, delay. Again, the counter-factual and the facts match.

    Still, I have a problem. If my behavior doesn't fit their models and assure them that the revenue will keep coming to those pools, these guys are going to tell me to start foreclosing and foreclosing fast. They want to get their money OUT. If I'm an originator-servicer, or a packager-servicer then maybe I can mollify them for a time by massaging the pools. As in: "We end up restoring them, and they go back in the pools."?????

    Is this the counter-factual and the facts matching once again?

    Finally, if I'm a desperate originator-servicer or packager-servicer and I didn't put the loans out to a truly "arm's length" entity and the securitizing agreements are "flexible" enough, I am going to start to head off recourse by either buying back some mimimum of vulnerable tranches myself (Santander?) *or* by siphoning off cash to the pools somehow.

    Are we seeing a lot of complex, total-return swap agreements these days? Have desperate originator-servicers and packager-servicers engaged in a bit of semi-off-balance-sheet synthetic DE-securitization? Are banks being generous with cash collateral on deals that transferred risk (but not formal ownership) from their QSPEs back onto their own balance sheets?

    Now if I saw that kind of stuff, I would definitely start to believe that banks are dealing with a problem of unserviceable loans.

    You get what I mean.

  • Comment Link John Ryskamp Tuesday, 19 October 2010 17:17 posted by John Ryskamp

    They weren't in a position to sue the United States, but the United States will be brought in as a defendant in these cases. Why? Because now the bankruptcy of the United States is at issue.

    Do you think the New York Fed and Bill Gross will be content to "share the spoils." Don't think so. Gross will sue the New York Fed if he has any brains. Remember, you sue everyone. And that's what will bring in the United States.

    The United States can define money, but it can't define bankruptcy. That is an objective test. Watch out for this! Remember what brought down Louis XVI: the bankruptcy of France.

    This is the end game for our poor economy. In the end, thieves always fall out.

  • Comment Link Reggie Middleton Tuesday, 19 October 2010 16:28 posted by Reggie Middleton

    You have to stop looking at this financial transaction strictly as a lawyer. The monolines and GSEs have accelerated cutbacks for two years now. Tell me, what did they get back?

  • Comment Link John Ryskamp Tuesday, 19 October 2010 16:17 posted by John Ryskamp

    In short, Reggie, stop looking at "investors" as investors. Start looking at them as co-conspirators, because that's the essence of a Ponzi scheme. EVERYONE is a co-conspirator. Don't fall for these "investors'" RIDICULOUS line that, gee, they just made an innocent investment and now they deserve to get their money back. Rubbish. Absolute rubbish.

  • Comment Link John Ryskamp Tuesday, 19 October 2010 16:14 posted by John Ryskamp

    There will be no cash. Tell me what will happen when the banks wheel around and say, "Your investment was an unsecured, uncallable loan, you do not have a security interest. You knew all the facts involved in this. You hands are unclean. You participated with us in this."

    Everyone is going to turn on everyone else. Think: NO ONE'S HANDS ARE CLEAN. Stop thinking so lockstep. Stop accepting what things are represented as being. Look at things as they really are.

  • Comment Link Reggie Middleton Tuesday, 19 October 2010 16:10 posted by Reggie Middleton

    Cash is king here. Which asset would you prefer if you had a choice, cash, foreclosed house, MBS? The choice is clear!

    Also, it doesn't matter if the securities were backed by hornet ass, the investors want to put it back to the banks at face value. the difference between face value and actual value is the banks' problem. That is the gist of the blog post.

  • Comment Link John Ryskamp Tuesday, 19 October 2010 15:43 posted by John Ryskamp

    Sorry, Reggie, but you're missing two big issues. Here's what YOU say:

    "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."

    1. What assets? First, the investors are going to charge that the securities they own are not backed by anything, since the banks DID NOT OWN THE UNDERLYING DEBT. You're saying they did? Prove it. This is the point of today's story that debt was sold to SEVERAL investors.

    Point? Investors are not just suing for put back. That's very naive. They will sue for FRAUD--the banks sold them something THE BANKS DID NOT OWN IN THE FIRST PLACE.

    2. The investors want THE HOUSE. The debt will take forever to litigate. How to get the only asset you can sell: THE HOUSE.


    Our sainted "homeowners" signed off on every lie in the book, took part in every misrepresentation.

    The FIRST thing the investors should do is to ask the Court to impose a constructive trust on the TITLE HOLDER, placing the title in that trust. Or just get a court order STOPPING ANY TRANSFER OF TITLE.

    We haven't even BEGUN to explore the fraud in this entire Ponzi scheme. DON'T leave the "homeowner" out of it. These clowns were also scamming the system. Make them pay.

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