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