Wednesday, April 7, 2010 as of 11:14 AM ET
Published October 20, 2010
| FOXBusiness
FOX Business has obtained a letter issued on behalf of major bondholders to Countrywide Home Loans Servicing and Bank of New York (BK) that sets the stage for a very nasty court fight over $16.5 billion worth of allegedly rotten and fraudulent mortgage-bonds now owned by the New York Federal Reserve, Freddie Mac, Pimco and MetLife Insurance (MET), among others.
The investors demand that the banks take back on their books $16.5 billion out of an estimated pool of $47 billion worth of potentially sour mortgage-backed bonds built on allegedly bad and "predatory" loans.
Bank of America (BAC) bought Countrywide in 2008.
Signatories to the letter, from the law firm, Gibb & Bruns' Kathy D. Patrick, are: BlackRock Financial Management, Freddie Mac, Pimco Investment Management, Kore Advisors, Metropolitan Life Insurance Company, Western Asset Management Co., Neuberger Berman Europe, Freddie Mac, and Kore Advisors LP.
BlackRock (BLK) was hired by the New York Fed to oversee its $1.25 trillion mortgage-backed securities portfolio.
The New York Fed, and officials at Freddie Mac and Fannie Mae, already told FOX Business Tuesday that they intend to protect their balance sheets from further writedowns related to bad loans and securities built on the backs of fraudulent loans. Reports circulating now suggest that the proxy disclosures for some of the bonds in the pool were sold as "Credit Blemished Mortgage Loans," which means that there was disclosure about the poor quality of the underlying mortgages.
The Federal Bureau of Investigation has been conducting criminal probes of mortgage-backed securities fraud on Wall Street since 2008, news of which FOX Business broke in early 2009.
The FBI tells FOX Business it has already been looking into potential frauds related to securities built on foreclosed loans as part of its ongoing probes. The White House has an ongoing Financial Fraud Enforcement Task Force (which includes the Justice Department and the Department of Housing and Urban Development), which has been investigating for several months a number of issues related to mortgage servicing. The FBI has a mortgage task force in many of its field offices as part of these probes.
FOX Business' Peter Barnes obtained a response to the letter from Bank of America: "We're not responsible for the poor performance of loans as a result of a bad economy. We don't believe we've breached our obligations as servicer. We will examine every avenue to vigorously defend ourselves."
In pretty stiff language, Gibbs & Dunn's Patrick says in the letter to Countrywide and Bank of New York:
- Countrywide continued to keep defaulted mortgages on its books, rather than foreclose or liquidate them, "in order to wrongfully maximize its servicing fee."
- Countrywide's "failure to proceed appropriately" and its "failure to maintain records in an accurate, appropriate, and adequate manner" has "caused wholly avoidable delays that have injured investors, borrowers, neighborhoods, and communities."
- Countrywide's "delays" have enriched the bank, as it "continued to charge unearned and unwarranted servicing fees on mortgages which would have been liquidated" but for Countrywide's "breach" of its duties.
- Countrywide "wrongfully modified loans" held in the trusts "to settle predatory lending claims made by various Attorneys' General," in turn sticking the trusts with those losses but not their parent companies, and that they "also unjustly" and wrongfully "enriched" themselves by using collateral "to settle claims that are not, and could never be made against investors."
Patrick's letter also alleges that Countrywide, as master servicer of the loans in the mortgage-backed securities pools, failed in its duty to inform the parties in the deals of any "breach of loans representations or warranties that materially/adversely affect the interests" of the investors in the MBSs -- even when mortgage bond insurers MBIA, Ambac, FGIC and Assured Guaranty had "specifically notified" it of certain loans that didn't meet insurance standards. The allegation is that these securities were so bad the bond insurers would not pay out on them.
And Patrick's letter says that despite there being "tens of thousands" of loans supporting the mortgage-backed securities pools, many of which were likely rotten, Countrywide surprisingly "has never notified" investors of "even one mortgage that violated applicable representations and warranties."
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