From a September 13 Bloomberg article by Hugh Son, it appears that the Association of Financial Guaranty Insurers (made up of Ambac, Assured Guaranty and several of the other large insurers) fired a letter off to Bank of America’s Chief Executive Officer Brian T. Moynihan claiming that more than half of the soured home-equity credit lines and residential mortgages created from 2005 through 2007 that insurers examined should be bought back.
Clearly, the insurers feel that they should not be on the hook for these problem mortgages and the payments they have made or will have to make for the failure of the underlying MBS securities which they insured. And even more clearly is their attempt to jump on the bandwagon of “who’s to blame and who is to pay.”
With most of the mortgage companies gone (can’t really go after Ameriquest, New Century, Fremont, etc. . . .etc. . .etc), the only guy in the room with some cash is BofA, having to pay for their stepping into Angelo Mozilo’s shoes at Countrywide. What is interesting is that the repurchase number being thrown around is between $10 and $20 billion, which is only about 2.5% to 5% of Countrywide’s reported production of $400 billion for 2007. It appears that somewhere the numbers don’t seem right.
As was noted in the article, the battle for repurchases is tedious, with the legal fights having to be done literally hand-to-hand (loan by loan basis). To “back of the envelope this, on a $20 billion portfolio of repurchase loans with an average loan balance of say $200,000, we are talking about 100,000 loans. In court, the party demanding repurchase has to show why a specific loan has to be repurchased. It’s not that the loan is in default, but rather that the loan violated a specific representation or warranty set forth in the pooling and servicing agreement, usually at the time of origination of the loan. And each of the 100,000 loans has to be individually shown by the party requesting repurchase to have breached a specific representation. I have seen this in practice at Fremont. It’s as if the repurchase requesting party is trying to storm a castle, one arrow at a time. All BofA has to do is stand at the wall and wait for this war of attrition to fade away.
Generally, there were more than 50 representations and warranties relating to the mortgage loans in the pooling and servicing agreements, of which maybe a dozen or so could be substantive to a repurchase request. Therefore, the man-hours needed to develop the repurchase request for 100,000 loans would be difficult, at best. And who pays for the cost of developing the repurchase request? The pooling and servicing agreements generally provide for servicer and trustee reimbursement of costs, but it is unclear if other third parties would have an ability to recoup costs. That makes enforcement of repurchases somewhat challenging.
So, with BofA being one of the only players left, why not pile it on. “Buck Buck Number 9 coming in”
The Bloomberg article can be seen at http://www.bloomberg.com/news/2010-09-13/bofa-may-owe-20-billion-in-mortgage-buybacks-insurers-say.html.
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