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Bank Of America Settles Part Of RMBS Claims

11:54 am in Economy by masaccio

Image by The Cornballer

The Bank of America (BAC) and its Countrywide subsidiaries have entered a Settlement Agreement with the Bank of New York as Trustee for 424 different RMBSs, which was filed this morning with the SEC. Dday has the early reports here. Here’s what it really does.

1. It settles claims that BAC and Countrywide breached their duties with respect to a) origination, sale, or delivery of loans to the Trustee; b) documentation of mortgage loans, including issues with respect to “…alleged defective, incomplete, or non-existent documentation, as well as issues arising out of or relating to recordation, title, assignment, or any other matter relating to legal enforceability of a Mortgage or Mortgage Note,”; and servicing of mortgage loans. See ¶9, starting with clause (i).

2. It sets specific servicing requirements for all remaining loans in each pool.

3. It requires BAC to produce an exceptions list showing documentation errors, and to work on curing those errors, reporting monthly.

4. If a document is still on the revised exceptions list, with both a documentation error and a title insurance error, when an RMBS tries to foreclose, and if the RMBS is unable to foreclose because of documentation errors, and if no insurance is available, then BAC has to pay the entire loss.

Here are two things it doesn’t do;

1. It doesn’t cover investor claims for securities fraud and all related claims of non-disclosure. The parties couldn’t even settle the question of whether payments under this settlement are a setoff against fraud claims. See ¶10.

2. It does not cover claims investors in RMBSs might have against the Bank of New York as Trustee for accepting bad instruments.

There are some interesting issues on documentation errors. BAC does not have to list a MERS loan on the exceptions report for title policy problems (or maybe at all; the document isn’t clear). ¶6(c) Only loans on the exception list for both document and title insurance issues are entitled to be paid off if the RMBS cannot foreclose. BAC won’t have to pay off on MERS loans with inadequate documentation. That seems odd, since MERS loans are no less likely to have enforcement difficulties than any other loan. Perhaps the settlement payment is thought to be enough to cover the MERS loan documentation errors.

The settlement is based on the theory that documentation errors can be cured at this late date. Yves Smith has argued convincingly that the window for cure of most documentation errors closed years ago.

The deal does not protect Bank of New York as Trustee from suits over its own failure to comply with the documentation requirements of the Pooling and Servicing Agreements (the contracts that create the RMBSs). It has proven difficult for the investors to get together to sue both trustees and the underwriters who sold the RMBSs. This deal requires the Bank of New York to obtain a court order approving the deal. Surely all of the investors are entitled to notice. This is a great chance for them and their lawyers to discuss common interests. If the investors work together, maybe they can do better than pennies on the dollar.

And Gawker has it right: Bank of America Will Make Amends for Destroying Economy by Paying Billions to Other Banks. One of those banks is Goldman Sachs.

Update: Cynthia Kouril points out that the documentation section, ¶6, may be designed to hide the extent of lousy documentation in MERS loans. The Settlement Agreement says that BAC has produced three reports of documentation errors in connection with the negotiations. ¶6(a)(vi). An enterprising person with standing to object, like, say the New York Attorney General, Eric Schneiderman, could demand production of those and maybe get a quick read on how bad the MERS loans look. That might be a real eye-popper.

Giant Banks Suck At Student Loan Spigot

3:37 pm in Uncategorized by masaccio

After Sallie Mae, the largest student loan finance companies are giant banks: Citi, Wells Fargo, Bank of America, and JPMorgan Chase. As best I can tell, none of these entities are using the bailout programs Sallie Mae uses. They don’t need to. The terms of the government guarantee make the loans so lucrative that they just carry the loans on their books and make huge profits.

Let’s look first at JPMorgan, because its 2010 10-K is a bit easier to follow. JPM has a deposit base of $882 billion, which it considers a stable source of liquidity for its loan portfolio. P. 77. The average interest expense for all of those deposits in 2009 was .55%. P. 258. As a side note, that isn’t good for savers, including retirees trying to live on the income from their savings.

At 12/31/09, JPM held $15.8 billion in student loans on its books, and perhaps an additional $.1 billion in retained interest in interests in securitized loans. P. 61, 199. There is no direct statement about private loans on the books. Loan loss reserves for student loans appears to be small, which is indirect evidence that private loans, if any, are a small part of the portfolio. Let’s assume that all loans on the books are government guaranteed to 98% of principal and 97% of interest. Interest rates on these loans are set by the government. The bank has to pay an origination fee of 1% to the government for all guaranteed loans. If we assume that all were issued at the lowest interest rate of 5.6%, JPMorgan has a guaranteed gross profit of 4.05%, before any losses, and we know it is higher. That comes out to an almost risk-free gross profit of $640 million. For new loans, JPMorgan has the right to sell those loans to the government for face value plus the origination fee plus accrued interest plus $75. Sweet.

Citi appears to pay more for deposits than JPMorgan Chase pays. According to its 2010 10-K, it paid an average of 1.5% on all deposits. The figures aren’t comparable, though, because Citi includes FDIC fees as part of its deposit interest expense. P. 94, 95. It has $20 billion in government guaranteed loans on its books. With the same assumptions, it has a guaranteed gross profit of more than 3.1%, $620 million almost risk free, and with the same right to sell the loans to the government.

The Bank of America pays an average of 1.05% on its deposits. P. 95. It originates a lot of loans, but apparently it securitizes them. It looks like the portfolio including all of those is about $1.1 billion. P. 148. There is profit there, but is hard to see how much goes to the Bank.

Wells Fargo, which includes the former Wachovia, has an average cost of .44%. Financial statements, year ended 12/31/09, large .pdf. P. 90-91. It also securitizes its student loans, and it isn’t clear what their share of profits might be.

It’s the same for the other large bank lenders. With the government guarantee in place, the bank can fund itself, and the student loan, which is almost risk-free, is an excellent thing to have on the books. And Sallie Mae has its own bank, on top of every other way it makes money. Why, it looks like just another part of the bailout, doesn’t it? Thank heaven Congress and the Administration stopped this senseless waste of money.