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“Today, I’m announcing the biggest loan modification in American history,” California Attorney General Jerry Brown said at a press conference Monday morning. “Bank of America settled because their new entity, Countrywide, was guilty of massive irregularities.”
Thanks to the California Attorney General and 10 others states AG’s massive $8.4 million settlement, Bank of America has now become the new poster child for predatory lending and deceptive mortgage practices. A title once held by the lending giant of the sea, Countrywide Home Loans.
When you gobble up a massive portfolio of predatory loans and then merge with the biggest predator, you become the biggest predator. There is no degree of separation between the two because they are one.
Countrywide Financial and all its toxic glory is now Bank of America.
Bank of America’s once a squeaky clean lending brand has been severely tarnished and infected by toxic loans that they inherited by purchasing the poster child for the mortgage and real estate melt down, Countrywide Financial.
The AG’s settlement of $8.4 billion is that it really small potatoes in relation to the magnitude of economic destruction that these Countrywide predatory and deceptive mortgages are having and will continue to have on our local and national economies. Couple that with the fact that B of A paid $4.1 billion in stock and now this purchase has the makings to be one of the worst investment moves in the history of the banking and investment world as we know it.
The size of the mortgage servicing unit that the former Countrywide Financial, now Bank of America controls is gargantuan. Just In 2006 Countrywide financed 20% of all mortgages in the United States, at a value of about 3.5% of United States GDP, a proportion greater than any other single mortgage lender and also held the nation’s largest mortgage servicing portfolio of $1.35 trillion.
$8.4 billion in loan modifications is but a trickle in a tsunami of Countrywide loans serviced now by Bank of America valued at $1.35 trillion.
At the time B of A acquired Countrywide, the existing real estate owned AKA REO and or foreclosed homes in just California was in the $2 billion plus dollar range. These depreciating assets that are growing by the REO day and are going to do a lot of damage to their bottom line. A lot more than Countrywide may have led Bank of America investors to believe.
Then you have the nasty pay Countrywide Pay Otion ARM’s that have been hiding in that $1.35 trillion dollar portfolio waste land. I wrote about these sneaky negative ammortization mortgage accounting practices used on these devilish loans back in January of 2008.
What the media and public fail to realize is that most of the accounting rules governing the books of these big banks play hugely in the their favor in hiding actual write downs and losses.
According to General Accepted Accounting Roles (GAAP), lenders like Countrywide Home Loans can claim deferred interest (negative amortization) as income and the lender can count as revenue, the highest amount of an Pay Option ARM payment (fully amortized payment), even when the borrower is making the bare minimum payment as their mortgage balance goes up.
This means that lenders can claim this bogus future revenue as income now, even though they know full well that this loan will most likely default. The typical difference between the actual note and the 110% or 125% reset is allowed to be placed on the books of the lender as an asset. This is huge in a state like California. Thus, the lender can offset massive losses with these sneaky and creative accounting practices. (sneaky mortgage business 2.0)
About three-quarters of the $79.5 billion of loans held as long-term investments by Countrywide Financial are either option adjustable-rate mortgages, known as option ARMs, or home-equity loans.
Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization and in California, properties already underwater are going down further and further by the day as borrowers hang on to their home for one more month.
In a letter back in January published by CNBC, Senator Charles Schumer addressed the extent of Countrywide’s Pay Option ARM problems with in a letter to Federal Home Loan Bank Chairman Ronald Rosenfeld. The letter was sent to Rosenfeld after had made $51.1 billion in advances to Countrywide as of September 30, 2007.
Countrywide’s ability to shed its highly toxic mortgage efficiently has been nothing short of impressive or deceiving? In the FHLB Atlanta deal, the ex- lending giant had pledged $62.4 billion of mortgages as collateral for the FHLB advances, representing 78 percent of its total mortgage loans held for investment at the bank.
I find these numbers alarming as reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis. Moreover, it is my understanding that Countrywide’s loans held for investment at the bank have been far from immune from the credit deterioration that has resulted from unsound lending.
Countrywide reportedly held $27 billion of “pay option ARMs” as of September 30, 2007, accounting for over one-third of the loans held for investment by the bank. Countrywide’s option ARMs were (and may still be) often underwritten with less than full documentation – according to UBS Warburg data prepared for the Wall Street Journal, 91 percent of Countrywide’s option ARMs underwritten in 2006 were “low doc.” It has been reported that delinquencies on Countrywide’s pay option ARMS are skyrocketing, jumping nearly 75 percent in the last quarter.
“We know that about $27 billion of these holdings are Pay Option ARMs. We have also seen data to the effect that Countrywide originated well over $100 billion of these loans into the secondary market—with unknown buyback exposure lingering. Either way, someone will be hit by these hot potatoes, and the search to find out who promises to be every bit as dramatic as it was for subprime.”
This is just the tip of the toxic mortgage ice berg for Bank of America’s newly purchased banking and mortgage servicing problems. The extent of the national and economic damage that has been done by Countrywide’s reckless lending behavior is now B of A’s problem and a problem that may take them down just like the Titanic and many of their banking counter parts.
Bank of America’s once confident captain and now pessimistic CEO, Ken Lewis may be hinting that the banking giant is not fail proof with his recent quotes in the press.
The troubles hint at a horrific earnings season and show how much the deepening woes of consumers are weighing on the nation’s biggest retail bank as it grapples with rising delinquencies in everything from mortgages to credit cards to small business loans.
As it turns out, even Bank of America’s heft and diversity are not enough to get it through the worst financial crisis in at least two decades. The sacrifice of its long-sacrosanct dividend is further evidence that the nation’s economic troubles could get worse before they get better.
“It’s a damn disaster,” Chief Executive Officer Kenneth Lewis told analysts, when asked about lending conditions. “We are making every good loan we can find” but “it’s not going to be pretty for awhile.”
Yes Ken, it’s a damn disaster!
