Banks, News

Bank Of America’s Countrywide Acquisition Gets 2.5% Worse

Bank of America bought Countrywide Financial in 2008 and it’s fair to say that went poorly; the Wall Street Journal totted up total Countrywide losses at about $40 billion but that was in July so they’re probably, like, $80 billion by now. If you were trying to figure out the maximum past and future losses you might start with the fact that Countrywide Financial originated about $2.2 trillion of mortgages between 2003 and 2007; ignoring anything before that you might ballpark the upper bound at $2.2 trillion. Let me draw you a Venn diagram, because this is now that kind of blog:

Eventually that yellow circle can grow to the size of the blue circle, but no bigger: the absolute highest number of fraudulent mortgages that Countrywide could have written is “all of the mortgages it wrote.” Right? No, wrong, of course:

Federal prosecutors sued Bank of America on Wednesday, accusing the bank of carrying out a mortgage scheme that defrauded the government during the depths of the financial crisis.

In a civil complaint filed in New York, the Justice Department cited the bank’s home loan program known as the “hustle.” Prosecutors say the program, which Bank of America inherited with its purchase of Countrywide Financial during the crisis, was designed to churn out mortgages at a rapid pace without proper checks on wrongdoing. The bank then sold the “defective” loans to Fannie Mae and Freddie Mac, the government-controlled housing giants, which were stuck with more than $1 billion in losses and many foreclosures.

I think – could be wrong – but I think this is the first time somebody has sued Countrywide for selling fraudulent mortgages that somebody else was suing Countrywide over? The DOJ’s complaint is here, and it covers prime loans originated at Countrywide and sold to Fannie and Freddie between 2007 and 2009 (by which time it was BofA-owned). Meanwhile Fannie and Freddie are independently trying to get back money from BofA for what I’ll assume is a significantly overlapping pool of mortgages? Pretend there’s another Venn diagram here, or just read pages 61-62 of BofA’s 10-Q:

Our current repurchase claims experience with the GSEs is concentrated in the 2004 through 2008 vintages where we believe that our exposure to representations and warranties liability is most significant. Our repurchase claims experience related to loans originated prior to 2004 has not been significant and we believe that the changes made to our operations and underwriting policies have reduced our exposure related to loans originated after 2008.

Bank of America and legacy Countrywide sold approximately $1.1 trillion of loans originated from 2004 through 2008 to the GSEs. As of June 30, 2012, 12 percent of the original funded balance of loans in these vintages have defaulted or are 180 days or more past due (severely delinquent). At least 25 payments have been made on approximately 66 percent of severely delinquent or defaulted loans. Through June 30, 2012, we have received $39.1 billion in repurchase claims associated with these vintages, representing approximately three percent of the original funded balance of loans sold to the GSEs in these vintages. We have resolved $27.8 billion of these claims with a net loss experience of approximately 31 percent, after considering the effect of collateral.

So that’s vague and there’s probably some non-overlap – e.g. 2009 loans? – but, still, Fannie Mae seems to be trying to get money back on a lot of the same mortgages at issue here.

The DOJ lawsuit doesn’t contain much that will surprise anyone. Countrywide sold prime mortgages into GSE pools; starting in 2007 it saw the handwriting on the wall for the subprime business so shifted its focus into prime; it brought the same shoddy underwriting and desperate desire to incur liability1 to its rejuvenated prime business that had made it such a success in subprime; events transpired. Mostly it’s 46 pages of (1) everyone was incompetent, (2) nobody verified income in the no-income-verification loans, (3) when they found defects they hid them, and (4) there were some shifty-looking changes in procedures and compensation practices whereby Countrywide went from “try to originate lots of good mortgages” to “try to originate even more lots of mortgages with no quality standards whatsoever and also there’s a bonus for steamrolling quality-control checks.”

Also it’s got a terrible name. One of these days there’s going to be a lawsuit about a mortgage lender’s Fast Reply – Alternate Underwriting Data program, FRAUD for short, and we’ll all get a slightly bigger chuckle over that than we did over:

After a pilot test in 2006 led by two senior managers transferred from Countrywide’s Consumer Markets Division, FSL [CFC’s “Full Spectrum Lending” division] fully implemented its new model for loan origination – the “Hustle” – in mid-2007. The Hustle (or “HSSL”) was the term for FSL’s new “High Speed Swim Lane”2 model for loan origination. Operating under the motto, “Loans Move Forward, Never Backward,” the Hustle aimed to reduce the amount of turn time on loans.

Why is the DOJ bringing this $1 billion case instead of just, like, handing off its Hustle info to Fannie and Freddie to use in their multi-billion dollar ongoing putback disputes? I mean, you can probably go ahead and count “grandstanding” on your list of reasons; everyone wants to have some mortgage lawsuits and Preet Bharara probably wants to have more than anyone else.

But also fun reasons! For one thing, the whole “leave it to Fannie to demand putbacks” route is somewhat complicated by the fact that BofA is being snitty about Fannie’s putback demands and has stopped selling it mortgages as revenge/sulking. “Good riddance” is I suppose one possible answer for Fannie? But apparently not? I dunno. Anyway the la-la-la-I-can’t-hear-you approach that BofA has adopted to putback claims probably works less well against federal prosecutors, so this suit at the very least puts more pressure on BofA to cough up some money.

Also: a lot of money. The DOJ is suing under statutes including the False Claims Act, which provides a penalty of “3 times the amount of damages which the Government sustains,” and the FIRREA, which provides penalties of up to $1 million per violation for crimes affecting federally insured financial institutions. This is important for your Venn diagram: not only might Countrywide have to pay twice for the same mortgage – once to Fannie/Freddie on a putback, once to the DOJ on this lawsuit – but this lawsuit itself might lead to triple damages plus $1 million per mortgage.3 If Countrywide was in fact massively fraudy in 2007-2009, there is good reason to make that massive fraud more costly than just buying back all the mortgages that it originated: because next time, someone contemplating cutting corners with the GSEs (or whoever the next victim is) will think “ooh that could lead to massive penalties” rather than “well, if I don’t get caught, I win; if I do get caught, I just go back to where I am now.” That’s how you learn, I guess.4

Most interesting to me though is this paragraph of the complaint:5

Relator Edward J. O’Donnell is a resident of the State of Pennsylvania. From 2003 to 2009, Relator was employed by Countrywide Home Loans, first as a Senior Vice President, and later as an Executive Vice President.

That dude’s gonna be rich! He seems to have been a risk management and quality control officer at Countrywide, and he seems to have brought this case as relator in February – probably miffed because Countrywide actually paid bonuses to originators who could refute quality-control checks! – and gotten the government to join it now. And relators get a cut of any money the government recovers in False Claims Act lawsuits.

One important reason for the DOJ to bring this case is just to reward Edward O’Donnell for his – not really that exciting but whatever – whistleblowing on Countrywide. Fannie and Freddie employees reviewing Countrywide loans and demanding putbacks are doing their jobs, but they’re not going to get rich doing so, and they can’t necessarily dig up all the finest dirt on Countrywide operations. Giving this guy a couple hundred million dollars for providing that dirt, as the DOJ basically can do, should get other disgrunted quality control officers to come forward with similar dirt on other fraudy situations. Though – won’t it also get them to sit on that dirt until it’s grown into a really valuable fraud?

Another day, another BofA mortgage suit [FTAV]
Federal Prosecutors Sue Bank of America Over Mortgage Program [DealBook]
U.S. ex rel. Edward O’Donnell v. Bank of America [via Reuters]
Manhattan U.S. Attorney Sues Bank Of America For Over $1 Billion For Multi-Year Mortgage Fraud Against Government Sponsored Entities Fannie Mae And Freddie Mac [DOJ]

1. This reminds me of my second-favorite motivational speech I’ve ever received from a boss – after of course “don’t fuck it up.” I was a young lawyer off to negotiate some contract and asked a partner if he had any advice for me. He thought for a while, then replied, “don’t incur any liability.” If only Countrywide had thought of that.

2. Also, um, “swim lane”?

3. I mean: it won’t. But whatever.

4. This deterrence argument is obvious but importantly wrong: the putback liability itself far outweighs Countrywide’s profits on originating a loan. Countrywide’s misbehavior was not primarily selling the loan to Fannie/Freddie; it was making the loan in the first place. And the cost of a putback is not primarily due to CFC’s fraud; rather, it’s due to the collapse in the housing market and the collateral’s loss of value. So you don’t actually need the treble-damages deterrence, though I guess that’s no reason to stop you from seeking it.

5. Also the paragraph before it which reads in its entirety “Plaintiff is the United States of America.” Perhaps you’ve heard of us?

(hidden for your protection)
Show all comments

58 Responses to “Bank Of America’s Countrywide Acquisition Gets 2.5% Worse”

  1. guest says:

    …the fuck?

    • Your Grammer says:

      I know. I saw it, too.

      "the Wall Street Journal totted up total Countrywide losses at about $40 billion but that was in July so they’re probably, like, $80 billion by now."

      I tote

      He, she totes.

      They tote.

      They "toted".

      • PermaGuestII says:

        tot    /tɒt/, verb, tot·ted, tot·ting, noun
        verb (used with object), verb (used without object)
        1. to add; total (often followed by up ).

    • this is one of the worst acquisitions in Us history i know…..

  2. Higher expectations says:

    Is this chart your idea of a joke?

  3. guest says:

    You reap what you sow

    • GS Wiki QuANT says:

      RE: Footnote 2

      "A swim lane (or swimlane) is a visual element used in process flow diagrams, or flowcharts, that visually distinguishes responsibilities for sub-processes of a business process. Swim lanes may be arranged either horizontally or vertically. In the accompanying example, the swimlanes are named Customer, Sales, Contracts, Legal, and Fulfillment, and are arranged vertically."

  4. guest says:

    Boy, that was one shitty deal

    – K. Lewis

  5. lol says:

    -sound my brain makes at first sight of a Matt 'venn diagram' and the 3-inches of text below

    Seriously dude, what would Leatherface say?

  6. Guest says:

    Not a single tag? Other than that, I have no concerns.

  7. Guest says:

    He he..Matt's chart looks like a boob.

  8. -concerned reader says:

    is this really a blog? All this time I have been reading this site thinking it was a legitimate news source. Oh dear God, I need to call my broker.

  9. Mtg Guy says:

    A Fannie/Freddie repurchase isn't a 100% loss – you're buying back an asset that you sold in the past. Een if it's gone horribly delinquent or into foreclosure, you can always loan mod/short sale/REO sale your way out of the position and mitigate a 100% write off which you assume always happens in a repurchase.

    • Real Estate Agent says:

      So everyone gets their house, job and savings back?

    • PermaGuestII says:

      That would assume that BAC is capable of figuring out how to competently execute said mods/short sales/REOs (or can even find the title docs in the first place.)

  10. leeminbrahs says:

    "Countrywide Financial offers an array of sound investments"

    Never in my life have I witnessed a more toxic product.

    –The man with the permanent tan

  11. Ken says:

    I'd kill for a handy and a ham sandwich.

  12. Guest says:

    Matt, can you switch to the floating footnote format? Although I hate Grantland with a passion, their footnote format is much easier to read than stuffing them at the end.

    • Ta Da! says:

      Seriously, in order for him to do it, you need to explain how. The footnote method he uses looks like he wants you to print the post and read it, so his writing doesn't work with this medium.

      I would start by finding out how he generates the content. Does he do it with Word, save it as HTML and paste it into the tool or is he using some other process?

      From there, you should have enough to explain a procedure.

  13. Guest says:

    absolutely way too long to read

  14. Guest says:

    Matt, does this make you LOL?

    <img src=""&gt;

    • PermaGuestII says:

      It makes me think you enjoy attending Star Trek conventions.

    • guest says:

      Joke Briefer get in here STAT

      • TheJokeBriefer says:

        Dearest Guest: Thank you for your call. Your Joke Briefer sees the commentariat "pun-ishing" other readers with lashes of one-liner wit related to mathematical puns. The erudite Mr. Levine started the thread wherein another "Guest" posted an image of dinosaurs joking with puns. That led to additional puns related to famous names in mathematical and other science related spheres of influence. In order, and using the Halloween platform for pun layering, Leibniz's integration theory was punned by Ta Daa. Guest responded with a Marie Curie "glow" pun (She won 2 Nobel prizes!). Then Ta Daa used the Curie's Xray theory to "see right through that one". Ta daa responded with a financial Nobel prze team's pun. Guest quickly reponded with a Heisenberg theory of uncertainty pun and finally Darwin's work with evolution theory was dropped upon us.

        Your Joke Briefer has noted that in this part of Dealbreaker where comments are allowed, puns seem to be the most popular form of humor. Let us review this bit from the Wiki: "The pun, also called paronomasia, is a form of word play which suggests two or more meanings, by exploiting multiple meanings of words, or of similar-sounding words, for an intended humorous or rhetorical effect. These ambiguities can arise from the intentional use and abuse of homophonic, homographic, metonymic, or metaphorical language. A pun differs from a malapropism in that a malapropism uses an incorrect expression that alludes to another (usually correct) expression, but a pun uses a correct expression that alludes to another (sometimes correct but more often absurdly humorous) expression. Henri Bergson defined a pun as a sentence or utterance in which "two different sets of ideas are expressed, and we are confronted with only one series of words". Puns may be regarded as in-jokes or idiomatic constructions, given that their usage and meaning are entirely local to a particular language and its culture. For example, camping is intense (in tents).
        Puns are used to create humor and sometimes require a large vocabulary to understand. Puns have long been used by comedy writers, such as William Shakespeare, Oscar Wilde, and George Carlin. The Roman playwright Plautus is famous for his tendency to make up and change the meaning of words to create puns in Latin."

        Science makes for a great many puns. For example, the Higgs Bosun is not the title of a "naughty-cal" joke!

        • güest says:

          Close: Marie Curie died from radiation, therefore explaining the "green glow" about her.

          – Danny Glover

  15. HAM05 says:

    what kind of mysticism lets you put pics directly into comments??

    • Ta Da! says:

      'Tis easy young wizard.
      1) find the picture you want (on the internets)
      2) right click it and pick copy image url
      3) go to your handy-dandy intense debate comment and enter <img src=""
      4) between the double quotes, paste the url from 2.
      5) after the double quotes enter /> This closes the tag.
      6) make rest of snarky comment
      7) hit submit post.
      8) advanced users can harness the power of irony with strike-throughs. thusly this infers the power of irony. the poster.

    • Guest says:

      Hmm. He doesn't know basic HTML, which makes me think you're too old to have taken computer science 101 in the last decade or so but used the work "pics" instead of photos or pictures like an old timer would say. I'm guessing you're approximately 30-34 years old? If much younger, I'd say your university owes you a refund.

      – UBS Generation Quant

      • GeezerOilTrader says:

        "….like an old timer" ???? You little shits need to realize that back in the 80s when real oil was traded on a fucking phone …instead of pictures of genitalia like you little "first years" do today… "HTML" was short for what we used to say to a Bourbon Street hooker between bumping uglies while "holing up" in the St Louis Hotel: "Hot towel, my love…" . I know all you young, over educated, internet image meat beaters think you're smart with your fancy fucking typing on a computer's keyboard but hold all the fucking pride in until the current economy that you nearly fucked to death financially comes back. Back in the 80s, a young oil trader didn't send a pic of his dick to a woman over a phone! By God you did that shit in person in the backseat of a 1982 Oldmobile in Memorial Park!! You new little assholes don't realize we cut our fucking teeth on FORTRAN in the 70s!! And you even challenged the use of the word "pics" as some private new hipster-ifical, skin tight pants-ed, designer stubbled, Tom Landry-hatted, white frame sunglassed NEW WORD???And a university Re-Fund?? Like the government having to re-fund the fucking Ibanks that hired you young fuckers to uglify the image of a trader by producing combined financial losses greater than anyone at Enron could ever dream of. But, oh no, none of you little new bastards wouldn't be here today without "the seed" of old timers who survived WW2, Korea, Vietnam and Grenada with only the miniscule computer chip technology that most of the vibrating dildos you have in the drawer of your "work station" possess today!! Back in the 80s when we were listening to "Yes" sing "Boner with a Lonely Tart", we respected our fucking elders and didn't jump up their ass the minute they used the phrase, "the bees knees"!! We didn't think they were horny, lonesome old farts when they asked whether we ever used a "party line". We knew what they meant!! Goddammit, I farted out loud in a room full of our young hipster fucking dumbass traders and they all began fighting over who heard it first!!

  16. Guy with A.D.D. says:

    I just can't get passed the miscolored cocktail olive after the first paragraph

  17. ConcofConservative says:

    This crime started in 1995 with Fannie Mae bringing out desk top underwriter and Countrywide jumping on board as an initial customer with its CLUES program that abolished traditional underwriting in favor of computer algorithms that can get tweaked and massaged. Of course back then we had Mozilla, Mudd & Raines who never got charged with anything criminal, yet cost tax payers billions.

    • Guest says:

      Does that scumbag Angelo have any friends to golf with? If there is a God, he will die a very slow, painful and cancerous death.

  18. AbbyPlew says:

    Perhaps the blame could be put on the lead brokers because I believe they are the ones who are handling the the finances and the loans' and mortgages' interest. They must I think be responsible enough to manage everything well to be able to avoid any disputes in the company they are representing.

  19. otherwise the property may end up being a burden instead of helping to build wealth.

  20. sohbet says:

    Chair, I will bail out strippers. The rest of the argument becomes irrelevant because the world will be a kinder happier place with more strippers. And, hence, the U.S. shall maintain world leadership in porn by preserving the efficiencies of a an

  21. realistically the tax payers will end up paying for this as if this goes down then all of this bank will go down because of its large overhead and bad profits.

  22. Gilbert Lay says:

    Great post ! A wonderful site I really like it.

  23. Awesome point EL. I have no debt outside of a small mortgage, I work full time and go to school part time, but I still find time to hustle on the side. I started by selling some things on eBay, and actually now buy nice, gently used clothes cheaply and Goodwill and resell them with a typical markup of around 600%. Even if I only sell a couple items a month, an extra $100 ain't nothing to complain about. I definitely recommend it for anyone.

  24. Guest says:

    Matt's girl friend!

  25. guest says:

    Posted a picture of soulless ginger without a NSFW tag. Reported.