Friday, February 25, 2011

Legacy Assets - Not Much Of An Inheritence

The Wall Street Journal in its February 5-6, 2011 edition had an article by David Benoit, entitled "BofA Sets Mortgage Cleanup Unit". The article about Bank of America was in the middle of the "B" section and drew little attention. In fact, there was no follow-up in the WSJ nor was it reported in the rest of the press. Certainly it did not make the nightly news nor the newscasts on the radio.

Okay, what did the title mean? Was BofA establishing a department of custodians/cleaners, or maybe street sweepers? Nothing that community minded. What BofA did was to establish a Business Unit to "monitor the Bank's 1.3 million delinquent loans". In addition, it will deal with foreclosures and INVESTORS wanting their money back for the bad loans in the Mortgage Backed Securities they purchased. The unit is named the "Legacy Asset Servicing" group.

Legacy, as in an inheritance? - well not really. Legacy as in " this is what we got stuck with when we bought Countrywide and made our own bad loans". A bit of math here - 1.3 million loans, averaging $100,000 each totals $130 BILLION of delinquent loans, and here delinquent does not mean 30 days late, but, rather, seriously late - nearing foreclosure.

There are 55,000 employees in this unit. BofA hopes to reduce the number to 35,000. Sounds great for BofA, but the reduction is only from eliminating redundant operations so BofA profits increase. What's another 20,000 unemployed workers matter? Harsh assessment - yes. But, we now have $130 billion in loans (1.3 million loans) where people may have their homes foreclosed.

Because of these loans, BofA's mortgage groups lost nearly $9 billion in 2010 and had to reserve, put in escrow and promise not to spend, another $4.1 billion. If the investors get their way, and force BofA to buy back the bad loans in the MBS the investors bought, it is reported that BofA could lose another $10 billion. What is staggering is that, while stockholders might not be thrilled and some executives might get fired, the $10 billion will be only inconvenient for the Bank. That should give you an idea of the size of the Bank.

What the article does not state, and what is not being reported, is the tens of thousands of homeowners who will be losing their homes. Do some "deserve" it for not paying the bills because of frivolous spending, or because they used the house as an ATM by constantly refinancing until payments were impossible? SURE! But the majority of homeowners facing foreclosure are victims of job loss, illness, mortgage sales people who outright lied and falsified documents (of that I have first hand knowledge), and the general economic collapse.

If this Legacy Asset Servicing group really takes charge of all of these loans, there is at least some hope that through regulatory oversight, private lawsuits, federal legislation (don't count on that one), and the new Consumer Finance Protection agency, there can be an examination of these loans - maybe to stop foreclosures and force modifications. Nowhere in the story is there even the hint of BofA taking steps to help homeowners with modification; to change its own policy of "if we don't have the documents and recognize that we do, you will lose you home".

The investors want their money back. Why should they get it? The level of sophistication of these "investors" equals that of the Chairman of the Federal Reserve. Many of them packaged the loans and some created the Mortgage Backed Security product. Why should they just demand their money and get it. Yes, they have a contract that protects them - HOMEOWNERS DO NOT!!

Bank of America is only the biggest of the entities taking this kind of action. Every "Bank" with a large mortgage portfolio, or those who sold loans into what became Mortgage-Backed Securities are doing the same. The fear is that all of the investors who lost, or may lose, money (it may just be the income stream from the investments) will demand that the Banks who sold these "toxic" loans repurchase them, ridding the potential losses from the securities, thereby protecting the investors. The irony here is that the Investors created the monster that is now threatening to "gobble them up" in losses.

Is there anything wrong with centralizing the work with defaulted loans. NO! It's the right way to process the work. BUT if this is being done to streamline the foreclosure process, and to mollify investors so they get their money back (why can the rest of us buy an investment that has a guaranty that you can never lose money), the entire SYSTEM must be revamped.

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