Bank of America has long rued its decision in 2008 to acquire Countrywide Financial, the subprime mortgage giant. To date, the bank has set aside some $40 billion to settle claims of mortgage misconduct that occurred before it acquired the freewheeling lender.
It has been a regular refrain at Bank of America. Last month, Brian Moynihan, the bank’s chief executive, told Bloomberg television at the World Economic Forum in Davos, Switzerland, that carrying Countrywide was like climbing a mountain with “a 250-pound backpack."
But according to new documents filed in state Supreme Court in Manhattan late on Friday, questionable practices by the bank’s loan servicing unit have continued well after the Countrywide acquisition.
They paint a picture of a bank that continued to put its own interests ahead of investors as it modified troubled mortgages.
The documents were submitted by three Federal Home Loan Banks, in Boston, Chicago and Indianapolis, and Triaxx, an investment vehicle that bought mortgage securities. They contend that a proposed $8.5 billion settlement that Bank of America struck in 2011 to resolve claims over Countrywide’s mortgage abuses is far too low and shortchanges thousands of ordinary investors.
The filing raises new questions about whether a judge will approve the settlement. If it is denied, the bank would face steeper legal obligations.
Lawrence Grayson, a spokesman for Bank of America, denied the bank was putting its own interests ahead of investors.
“Modifying mortgages for homeowners in severe distress is critical to the ongoing economic recovery and is encouraged by the government at all levels," he said. “It is difficult to see how federally regulated entities like the Federal Home Loan Banks would seek to attack that practice which helps families to stay in their homes and in no way violated the contracts at issue."
Among the new details in the filing are those showing that Bank of America failed to buy back troubled mortgages in full once it had lowered the payments and principal on the loans — an apparent violation of its agreements with investors who bought the securities that held the mortgages.
An analysis of real estate records across the country, the filing said, showed that Bank of America had modified more than 134,000 loans in such securities with a total principal balance of $32 billion.
Even as the bank’s loan modifications imposed heavy losses on investors in these securities, the documents show, Bank of America did not reduce the principal on second mortgages it owned on the same properties. The owner of a home equity line of credit is typically required to take a loss before the holder of a first mortgage.
By slashing the amount the borrower owes on the first mortgage, Bank of America increases the potential for full repayment of its home equity line. Bank of America carried $116 billion in home equity loans on its books at the end of the third quarter of 2012.
The filing contains three examples of such modifications, all from 2010, well after the Countrywide purchase.
One example shows investors suffering a loss of more than $300,000 on a $575,000 loan made in 2006. In May 2010, Bank of America reduced the principal owed on a first mortgage to $282,000, but at the same time, real estate records showed, Bank of America’s $110,000 home equity line of credit on the property remained intact and unmodified.
Another example indicates that Bank of America kept its $170,000 home equity line intact on a property while modifying the first mortgage held by investors. In that case, the investors took a $395,000 loss.
Bank of America, the filing noted, “may have engaged in self-dealing and other misconduct, including in connection with modifications to first lien loans held by the Trusts where BofA or Countrywide held second lien loans on the same subject properties."
Triaxx conducted the analysis by combing through the thousands of loans administered by Bank of America in 530 securities issued by Countrywide from 2005 through 2007. Triaxx then ran the loans through an extensive database it has created of every real estate transaction conducted across the United States during the last decade.
“We’re confident that our approach will be successful for investors and that the facts speak for themselves," said Thomas Priore, founder of ICP Capital, who is overseeing the Triaxx analysis. “These are just a few examples of the negligence we found."
Triaxx’s loan analysis has been accepted in another mortgage suit involving claims against Residential Capital, the bankrupt mortgage company that is a unit of Ally Financial. Investor recoveries in that case, being heard in bankruptcy court in Manhattan, will be based in part on Triaxx’s work.
In the aftermath of the financial crisis, investors in mortgage securities have had difficulty identifying improper loan modifications and other servicer abuses like those described in this filing. Servicers have kept under wraps the detailed loan data that could point to these kinds of practices and have forced investors to sue to get access to these files.
Included in their court filing was a letter Triaxx and the other investors wrote to Bank of New York Mellon, the trustee that was hired to oversee the Countrywide securities to ensure that investors in them were treated fairly. The investors asked Bank of New York Mellon to explain why it had not pursued claims against Bank of America relating to the modifications on behalf of investors in the Countrywide securities.
Kevin Heine, a spokesman for Bank of New York Mellon, said in a statement: “As trustee, we have complied with our duties under the agreements and will follow any direction the court issues in connection with the letter."
The letter and the underlying analysis were filed in New York State Supreme Court where Justice Barbara Kapnick is overseeing the $8.5 billion settlement reached in June 2011 by Bank of America and a handful of Countrywide mortgage securities holders. That settlement, which covers the same 530 Countrywide securities examined by Triaxx, would generate roughly 2 cents on the dollar to the investors who agreed to it. When the securities were sold, they contained loans totaling some $425 billion.
The investors include the Federal Reserve Bank of New York, and Pimco and BlackRock, two large asset management companies. Bank of New York Mellon has also agreed to the settlement, releasing Bank of America from any future claims by investors trying to recoup their losses.
“Despite its knowledge of the Trusts’ Loan Modification Claims," the letter said, “the Trustee agreed to release such claims in the Settlement, apparently without any investigation of the extent or merit of such claims, and without any compensation for the Trusts with respect to such claims."
Priore said: “We’re mystified how other managers would allow these institutions to ignore their responsibility when it has such a significant impact on investors."
Trustees have been reluctant to take action against servicers on behalf of the investors in mortgage securities. Such actions would be costly, according to those in the industry, and would reduce profits in what is already a low-margin business. But this has left investors to fend for themselves with little information.