One of the straightest paths this country could take toward Bank Bailout 2, the Sequel, would be through forcing financial institutions to buy back the lousy mortgage-backed securities they sold before the meltdown. Large-scale buybacks could open gaping wounds on bank balance sheets, a risk Bank of America (BAC) is particularly vulnerable to because it swallowed Countrywide's gigantic -- and now infamously fraudulent -- mortgage machine. Regardless of that risk, banks should have to follow the rules of their contracts, and the law. But getting BofA to buy back its mortgage junk won't be easy.

As of June 30, 2010, BofA faced some $11 billion in requests for repurchase of such securities. Most of those requests came from government-sponsored entities such as Fannie Mae, from bond insurers, and from major investors. Less than a third of a percent -- $33 million -- were from so called "private label" buyers.

But those securities-holders are now beginning to make their demands, too. Investors in more than $1 billion of securities backed by 2006 vintage Countrywide mortgages have filed an unusual lawsuit to try to get many of those mortgages repurchased. That case, filed Wednesday in New York state court, is Walnut Place LLC v. Countrywide Home Loans Inc, and is one of the first investor putback efforts. Unsurprisingly, Bank of America told Reuters the suit was "meritless."

Investors Act Because Trustee Won't

Beyond the fact that the suit is one of the first investor attempts to force a large quantity of putbacks, it's unusual because the investors shouldn't have had to file it -- for two reasons. First, if the claims in the complaint are true, BofA is contractually required to buy back the mortgages. But also, Bank of New York Mellon, which is the trustee for the securities, is supposed to do the suing on the investors' behalf. BNYM's duty is to ensure the right mortgages are backing the securities. But it hasn't, so the investors have filed suit against BNYM as well as BofA, seeking to stand in BNYM's shoes and force the buy back.

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BNYM spokesman Kevin Heine had no comment on the suit, but if the allegations in the complaint are true, it's hard to see what grounds BNYM has to refuse to sue. Interestingly, the key allegations in this suit are unlikely to be the ones related to the mortgages, because the evidence that Countrywide loans generally weren't of the promised quality has already been shown to be quite strong.

No, the key will be demonstrating that the litigating investors had in fact crossed all the t's and dotted all the i's necessary to get the trustee to act. Unsurprisingly, plaintiffs attorney Leanne Wilson believes all procedural hurdles have been crossed, and that their case is strong. So I'm betting any explanation about why BNYM's not suing will key off of one of those procedural requirements. Either that, or BNYM will get off the couch and sue.

Trustees are generally loathe to act, because taking the wrong action could leave them open to suits from other investors. That said, it's hard to see why any investor would object to forcing BofA to buy back Countrywide's garbage mortgages. And it's not as if BNYM's taken no action requested by the investors. After the investors gave their evidence of contract violations to BNYM, the bank did ask BofA to buy the mortgages back. It was only when the issue reached the stage where it became clear that BofA would have to be compelled to honor the contract that BNYM balked.

Loans Weren't What Countrywide Claimed

As to the mortgages, all the loans in the $2.8 billion issuance were pay-option adjustable-rate mortgages, a type of loan that's performing particularly poorly. Option ARMs are notoriously shaky, because the pay-what-you-want feature meant most borrowers paid so little they didn't even cover the interest due, much less the principal, which meant that every month their loan debt grew instead of shrank. Worse, the borrowers faced payment resets that would suddenly jack up their payments.

Of course, if Countrywide had complied with the terms of its contracts with investors, lousy performance wouldn't give the investors the right to sue. But as the SEC and multiple state attorneys general suits discovered, Countrywide routinely violated its official underwriting standards, and the investors' research indicates that this securitization was classic Countrywide in that regard.

The investors investigated about a third of the 6,500 mortgages backing the securities, and found that two-thirds of them appear to violate the contracts. The violations include mortgages that didn't meet Countrywide's official underwriting standards -- no surprise there -- and mortgages that were supposed to be on primary residences but weren't. The investors have evidence suggesting that the remaining, as yet unreviewed, mortgages would also have a high rate of problems.

BoA's potential liability depends on how many mortgages violate the securities contracts, as every put back is priced at the outstanding principal on the mortgage at that time, plus any unpaid but due interest. Wilson had no estimate of the stakes at this time.

The most common way Countrywide allegedly violated its contracts was by selling into securities mortgages in cases when borrowers had less than 5% equity in their houses. Borrowers with little equity are at especially high risk of default. The suit also alleges Countrywide relied on inflated appraisals and made loans that it knew wouldn't be repaid, as evidenced in part by loans that defaulted within the first few months of the mortgage.

One Suit Among Many
The plaintiff's firm in this case, Grais & Ellsworth, has filed many other mortgage-backed securities cases. Its clients include the federal home loan banks of San Francisco and Seattle, and Charles Schwab. The defendants include essentially all the big banks: BofA/Merrill Lynch/Countrywide, JPMorgan Chase/Bear Stearns, UBS, Credit Suisse, Deutsche Bank, Morgan Stanley, and a handful of smaller institutions. Those cases also allege securitized mortgages were not what was promised, however they are slightly different.

The putback case is a breach of contract claim; either the mortgages violated the terms of the contract or they didn't, and the contract specifies the remedy: buyback. The others are state securities law challenges, and involve proving the securities' selling documents were materially misleading, investors relied on the bad information, and were harmed by it. Nonetheless the suits involve similar methods of identifying bad mortgages and make similar claims about the mortgages' quality. Not one of the other cases has advanced very far yet. Some procedural rulings have been made, but no motions to dismiss have been ruled on, much less has discovery started.

Crawling to Toward Resolution

The buyback suit too is a long way from won, and at this stage, it's hard to tell how it will ultimately play out. But no matter the result, these cases are painful reminders that the whole financial crisis is really a slow-motion disaster. Yes, we had our speedy crash, our flash-frozen markets and our period of government bailouts. But several years on, the true damage isn't yet known.

The mortgage-backed securities lawsuits and the risk they represent to the financial system continue to crawl toward a resolution. Likewise, the multiple aspects of the foreclosure mess are only incrementally being clarified.

For those who wonder how long will it be before we have a clear perspective on the damage wrought by Wall Street's recklessness and regulators' inaction, the only answer is Yogi Berra's: It ain't over till it's over.

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well written article!! Thanks for getting this information out there I will share this article with my friends and family.

July 17 2013 at 4:50 PM Report abuse rate up rate down Reply

Insider Trading - A. Mozila Countrywide Problem #1 Originator
Collusion with BOA Problem #2 Sponsor
Further Collusion with BONY Mellon Problem #3 Trustee
Now do an Abbott & Costello "Who's on First" in the NYS Supreme Court Problem #4
Clouded/Slandered Titles across America due to Chain of Title/Recording/Conveyances Prob.#5
SEC Fines Mozila- Big Whoop- No Jumpsuit, No Cage, No Time to reflect on impact to others - ?
Let's take a look at the Loans your Honor- the Endorsements...Who are the Noteholders? Who has standing to renegotiate void contracts? Remember these mortgages were all securitized fraudulently by Angelo Mozila of Countrywide. Huge Problem #6
Our Liberty Our Pursuit of Happiness has been impacted immensely by a white collar crime.
This is a BIG Picture issue that needs critical logical thought and legal remedy. It Befuddles me as to a corrective measure on inflated values, toxic loans, and created debt instruments. This is a massive Fraud and it could take years to sort it all out.

June 21 2013 at 10:31 PM Report abuse rate up rate down Reply

When I think of Brian Moynihan or Barabra Desoer, I think of the song by John Lennon called Piggies:
So if it walks like a piggy, talks like a piggy, by golly it’s a PIGGY!

BofA and it’s CEO Brian Moynihan reminds me of that song by John Lennon and George Harrison titled "Piggies" I invite you to listen to this song on youtube and see if it appropriately fits.
Have you seen the little piggies
Crawling in the dirt
And for all the little piggies
Life is getting worse
Always having dirt to play around in.
Have you seen the bigger piggies
In their starched white shirts
You will find the bigger piggies
Stirring up the dirt
Always have clean shirts to play around in.
In their ties with all their backing
They don't care what goes on around
In their eyes there's something lacking
What they need's a damn good whacking.
Everywhere there's lots of piggies
Living piggy lives
You can see them out for dinner
With their piggy wives
Clutching forks and knives to eat their bacon.

When I filed my lawsuit against Bank of America, I thought of the many others out there in the same situation. It was then that we decided to educate the public on what these piggy banks are doing, as well as unite us all together as one voice. Please help me turn this David vs. Goliath modification process, into a Goliath vs. Goliath.
Please stand with me and Brookstone Law Firm, and send an email to Bank of Abusing America that states that we will no longer tolerate their potentially illegal, fraudulent, irregular and abusive business methods.
So please send your email directly to Bank of America and include the following:
1. Your name
2. Your complaint concerning your experience with Bank of America.
3. Please end your email “I support John Wright vs. BofA Lawsuit!”
4. Please send a copy of your email to
5. Please send your email to BofA CEO Brian Moynihan:
I have created for all of those who have been abused by Bank of Destroying Americas potentially irregular, fraudulent and simply abusive home loan modification process.
Divided we might have fell America. UNITED WE MUST STAND!
My name is John Wright AND I AM FIGHTING BACK!
John Wright

July 22 2011 at 4:29 PM Report abuse rate up rate down Reply

The people who really lost in this, are the old people who's pensions were tied up in it. I know, many retired people who worked all their lives and saved for the rainy day - with that matching funds crap that was just propganda. Or the ESOP fable that was sold in lieu of cash bonus for a job well done. The investment hoses certainly aren't going to share with the little old man down the street who is 80 something. The stingy SOB's on Wall street are in it for themselves.

February 25 2011 at 10:54 AM Report abuse +1 rate up rate down Reply
2 replies to jkennedy806's comment

Whoa back up the bus, let me get this straight. The investors are suing cause they bought risky CDO's. HELLO!! when you jack azzes were making a ton of dough on CDO's and hedge funds you didn't complain. Now that the truth comes out, the investors are suing. OMG, this is just amazing. The country is about to tank into oblivion, no one has a decent job anymore, in fact, people now are more worried about having a job. Unemployment and Homeslessness is a new reality and these rich bast-retards are upset cause they played a hedge fund on CDO's and lost. Boo hoo for you. Wells Fargo is owned by Norwest Equity and NOrwest Investments they sell dervitatives globally and Warren Buffet has 23% invested.

February 25 2011 at 10:50 AM Report abuse +1 rate up rate down Reply

It is fantastic time to refinance home mortgage. As Clark Howard says it is very tough to find these low rates for long time. Search online for 123 Mortgage Refi they found me THE lowest possible rate.

February 25 2011 at 3:29 AM Report abuse rate up rate down Reply
1 reply to tombarnes88's comment

I am getting tired of this ... It is all BS. The banks know they did wrong, the Government knows they did wrong, Most educated Judges know they did wrong and it goes on and on. I know they did wrong and the people who lost their homes know the Banks and Lenders did wrong. What the hell is taking so long???
Meanwhile states like Wisconsin, Michigan, California, and Arizona are completely broke because of all this. The War in Iraq and Afghanistan took our money. Sending National Guardsman drain the states not to mention our boarder. Why don't we run this country like a business. We want to be police of the world but can't even police and protect our own citizens. If the Banks were really for America's well being they would help not keep the BS flowing. I am really tired ..... Arizona here.

February 24 2011 at 10:51 PM Report abuse +2 rate up rate down Reply
1 reply to Wayne's comment

In your article, you have placed no blame on greed, the failure of the Federal Reserve in not regulating this area ( Mr. Alan Greenspan), house flipper and speculators, and most of failure of due diligience by title companies, buyers and sellers, and least we forget Rep. Barney Franks of Mass. who felt that Fannie Mae and Freddie Mac should be used to approve loans without any money down and in many cases with appraisals 105% and more in excess of market value so people who could not otherwise own a home could. You really need to tell the whole story, not just blame the banks.

February 24 2011 at 5:45 PM Report abuse +2 rate up rate down Reply
1 reply to agdginger's comment

I agree but you left out Bill Clinton and Treasurer Secretary Rubin who were instrumental in doing away with Glass-Steagall so that commercial banks could join investment banks and sell billions of low grade housing derrivitivies.

Barney Frank & others just wanted the masses to participate in the wealth creating housing ownership class without being capabable or qualified and it all backfired with lots of help from almost all who participated!

March 01 2011 at 6:39 PM Report abuse +1 rate up rate down Reply

brazen legal arguments dressed up as news...does not news make.....thank God we have a legal system which allows for resolution of disputes in an orderly, thoughtful manner rather than crass conviction by a lynch mob...lack of reason and common sense creates more problems and less solutions not visa versa....assuming that you are not a schill working p.r. for plaintiff's attorney I would think that your writing would be more factually based....Tom K

February 24 2011 at 5:00 PM Report abuse -1 rate up rate down Reply

same old drill investor trying to make money if they had a job and work FORIT they would NOT lost a penny (facts)

February 24 2011 at 4:43 PM Report abuse rate up rate down Reply
1 reply to daveswrath0704's comment

You think all those people that lost retirement money behind these securities didn't work for it? There was a documentary out about 6 months ago, believe it was called "Inside Job" recommended for all that either lost money due to these junk mortgage securities or want to understand what how it happened and what deregulation really meant. I am still amazed that some think people were going in to BOA or any of the other begging for more of those worthless mortgage securities.

February 24 2011 at 6:06 PM Report abuse rate up rate down Reply