Remember how cool it was to get a do-over when you screwed up as a kid? Or how much you loved the teachers who just threw out your lowest grade of the year and didn't count it? Or how cool it is when your buddies give you a mulligan after you shank one into the trees? Well, PIMCO, Blackrock, and the New York Fed are looking for a mulligan. A big one. Right now they're talking about $47 billion, but that number is set to mushroom over the next 90 days.
The action is initially against Bank of America and Countrywide. Known as a "putback" (sounds an awful lot like "do-over", doesn't it?), investors are claiming that soured loans they were sold weren't serviced properly and therefore the bank (or the servicer in this case) should be forced to buy the loans back at par value, as though the transaction never happened. If they're right, this could have grim and far-reaching implications across a banking sector already besieged by a huge foreclosure mess.
Banks’ costs from repurchasing mortgages in securities without government backing may total as much as $179.2 billion, Compass Point Research and Trading LLC analyst Chris Gamaitoni estimated in August, including expenses related to lawsuits against bond underwriters.
It might be even worse than that. The Dallas law firm of Talcott Franklin is organizing a suit on behalf of investors holding $500 billion in debt.
At the heart of the issue is whether or not the banks and the servicers have met all their obligations - from the pre-purchase of an individual home all the way to securitization of the RMBS, and the continued servicing of the loans within the package - including proper foreclosure disposition. The foreclosure mess that has blown up over the past couple weeks had nothing to do with the requested putbacks, but it has served to shine a harsh light on the banks involved.
If this issue is for real, and it's as big as some people are suggesting, we might be in bank bailout territory again. Anyone up for another round of TARP? I think I'd like a mulligan on that one...
UPDATE: Here is a great visual of how bad this problem potentially is (and we're only talking about the first $47 billion):
http://www.zerohedge.com/article/can-you-spell-u-…
I take this thread title as a personal affront, I
to a duel, sir!
All just speculation right now, just trying to make something out of nothing, I think. Let's wait till those bank stocks hit rock bottom, and BUY BUY BUY. This is way too overblown
Eddie,
Scary.... I was discussing Gold and possible Fed action with Jorge last night when I mentioned this to him as something I'd be concerned about the Fed acting on before they announced the Lawsuit.
Honestly, this goes part in parcel with how to destroy a bank. Bank of America deserves to get screwed on this one, as much as I don't want to say it. Hell, so do most of the banks that did this. As much as I hate to admit it, I'm siding with the king of insider trading, Bill Gross of PIMPCO on this one. Usually, I despise a guy who front runs the Fed on insider information and then proceeds to buy on Margin to profit from the Feds soon to be clear actions, but I can make an exception for when it's an actually deserved insider play (and yes, he ramped up his MBS purchases on Margin in expectation for this event, in my humble opinion. How else would he be able to put himself in a position to profit from this).
As to the put-back covenant, this is what happens when you have a Covenenent Light complex security that is made with the intent of selling it quickly to investors. Put-backs are an attractive feature, and when you're shoveling more shit than a sewage worker, I would not be shocked if people bought these because the put-back feature was on it, especially considering that they are not the most common type of bond on the market.
I do disagree with you though. The put-back case is not a matter of having properly met their obligations, but investors benefiting from an already harsh reality that the Banks have fucked up because they were so interested in rushing out however many home loans they needed to feed the machine. That is the crux of Foreclosuregate, and this is the unexpected ramification of it. The foreclosure issue centers around that, particularly the proper titling and ownership of deeds attempted to be foreclosed upon. Now that the bondholders realize that they have the power to screw over the banks, I think that the banks will now be forced to review and check every single loan they bought, sold or issued, but it still will not fully resolve the foreclosure matter.
What I expect though, is that this will effectively be the entrance to QE2 without openly saying it. If we do a new TARP package, it will be the cover for QE2. Either way, nothing good can happen from this.
What I want to know is what will happen to the CRE markets?
Midas,
My money's on Eddie, no offense to you.
I saw this on CNBC last week. A problem with the lawsuit is that the statute of limitations to sue the trustees/originator for many of these securities is 5-6 years, and that you need a certain amount of the holders of the security to participate in the suit. Since this paper is all over the world, and many of these securities were issued in 05-06, they might not be able to organize a solid case before the statute of limitations expires.
Yves Smith is arguing that both parties will probably ending up settling due to the complexity of the putbacks (http://tinyurl.com/2az9cv7). Putbacks would be evaluated on a loan by loan basis, which is costly and could take a very long time. My guess is BAC gets crushed for a while but no TARP 2.0 will be needed (not that that would stop the Treasury from handing it out).
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