December 14, 2017

Fair Game: In Countrywide Case, Watchdogs Without Any Bark

But the case, being heard by Justice Barbara R. Kapnick, extends far beyond the impact of the settlement on Bank of America’s balance sheet. It is also laying bare an industry practice that has put investors in mortgage securities at a disadvantage and reduced their financial recoveries in the aftermath of the home loan mania.

The practice at issue involves trustee banks overseeing the vast and complex mortgage pools bought by pension funds, mutual funds and others. Trustees like Bank of New York Mellon were paid by investors to make sure that the servicers administering these mortgage deals, known as trusts, treated them properly. Trustees receive nominal fees — less than a penny on each dollar of assets — for the work.

But when mortgages soured, trustees declined to pursue available remedies for investors, such as pushing a servicer to buy back loans that did not meet quality standards promised when the securities were sold.

In other words, this case highlights a problem with trustees: they are a dog that could have barked but didn’t.

Before mortgage securities were undone by troubled loans, trustee inaction was not an issue. Trustees collected their fees at minimal effort and investors were satisfied.

But because trustees are hired by the big banks that package and sell the securities, their allegiances are divided. Sure, investors are paying the fees, but if a trustee wants to be hired by sellers of securities in the future, being combative on problematic loan pools may be unwise.

Trustee practices are under the microscope in Justice Kapnick’s courtroom because Bank of New York Mellon is the trustee overseeing all 530 Countrywide mortgage deals covered by the proposed $8.5 billion settlement. The trustee is supporting the deal between Bank of America and the 22 investors that include BlackRock, Pimco and the Federal Reserve Bank of New York. Losses by all investors in the securities are projected at $100 billion.

While lawyers for BlackRock and Pimco were negotiating this deal, other investors in the securities were not at the bargaining table. Nevertheless, they must abide by the settlement’s terms.

Some outside investors, including the American International Group, have objected, saying $8.5 billion is inadequate given the mountain of problem loans it covers. Lawyers for A.I.G. contend that Bank of New York put its interests ahead of other investors outside the settlement process. Had the trustee been more aggressive with Bank of America, the servicer administering the troubled securities, investors would have received more money in a settlement, A.I.G.’s lawyers say.

Bank of New York Mellon argues that the settlement is reasonable and that it has always acted in the best interests of all investors. 

But over the last two weeks, arguments and testimony have shed light on behind-the-scenes dealings during the settlement negotiations with Bank of America. Some of these details raise questions about the trustee’s assertiveness on behalf of all investors.

A crucial issue: the trustee didn’t request individual loan files from Bank of America to help determine how many mortgages had problems and, therefore, whether $8.5 billion was a reasonable recovery. A trustee has the right to request those files for investors who cannot get them on their own.

When loan files have been examined, recoveries have been far greater. Last year, for example, Deutsche Bank agreed to reimburse Assured Guaranty, a bond insurer, for 80 percent of losses on eight residential mortgage securities it had insured.

Asked about the basis for the $8.5 billion settlement, Kent Smith, a Pimco executive with experience in loan servicing, testified on June 7 that it came in part from an estimated percentage of problematic loans that was provided to the investors by Bank of America. But on cross-examination, he said the estimate was far lower than it would have been if Bank of New York Mellon had examined specific loan files.

The estimate, 36 percent, meant that just over one-third of the loans had violated underwriting representations and warranties made to investors. But a review of the loan files would have pushed the figure as high as 65 percent, he testified.

Additional testimony raised questions about fairness during the settlement talks. The 22 investors who struck the deal held at least 25 percent — a required threshold for taking action — in only 215 trusts, less than half the 530 covered by the settlement. No other investors had an advocate at the bargaining table. Asked who was representing investors outside the negotiating group, an in-house lawyer for Bank of New York Mellon said he did not know.

Then there’s an e-mail from Jason H. P. Kravitt, Bank of New York Mellon’s outside counsel, recounting how he told Bank of America that on one important point its and the trustee’s “self-interest” were aligned — neither wanted the Countrywide securities to go into default. If they did default, the trustee would have been forced to increase its oversight of Bank of America, adding to its costs. If the trustee did not sue the bank, investors could. 

Referring to a default, Mr. Kravitt said he told a Bank of America lawyer, “We don’t want it either, Chris.”

Asked about these matters, Kevin Heine, a Bank of New York Mellon spokesman, said, “We believe an $8.5 billion bird-in-the-hand settlement with significant servicing improvements is a far better result for all investors than the likely outcome following years of costly litigation.”

Trustees argue that they do not make enough money overseeing these loan pools to act on investors’ behalf. But this could be resolved if the Securities and Exchange Commission allowed or encouraged trustees to use trust assets to pay for loan reviews or litigation.

Justice Kapnick’s decision is not expected for months, and will affect only this settlement. But the revelations in her courtroom send a message to investors who might have expected trustees to protect their interests with more vigor.

Article source: http://www.nytimes.com/2013/06/16/business/in-countrywide-case-watchdogs-without-any-bark.html?partner=rss&emc=rss

As Budget Talks Continue, Markets Change Little

Stocks closed little changed Tuesday on Wall Street as budget talks continued in Washington.

The Dow Jones industrial average closed down 13.82 points, or 0.11 percent, at 12,951.78 after trading in a range of 82 points. The Standard Poor’s 500-stock index was down 2.41 points, or 0.17 percent, at 1,407.05. The Nasdaq composite index was down 5.51 points, or 0.18 percent, at 2,996.69.

Investors are waiting for developments on the budget talks, which are aimed at avoiding the government spending cuts and tax increases that would begin to arrive Jan. 1 and could eventually cause a recession.

President Obama said Tuesday that a proposal released on Monday by the House speaker, John Boehner, was “still out of balance.” Mr. Obama, in an interview with Bloomberg Television, insisted on higher taxes for wealthy Americans.

Republicans, led by Mr. Boehner, have balked at Mr. Obama’s proposal of $1.6 trillion in additional taxes over a decade, and called on Monday for increasing the Medicare eligibility age and lowering cost-of-living increases for Social Security benefits.

Among stocks making big moves, Darden Restaurants, owner of the Olive Garden, Red Lobster and LongHorn Steakhouse restaurant chains, fell $5.02, or 9.6 percent, to $47.40 after cutting its profit forecast for fiscal 2013.

Stock trading will probably become more volatile the longer talks go without a deal, J. J. Kinahan, chief derivatives strategist at TD Ameritrade, said.

Despite the lack of progress, the stock market has gained back nearly all of a postelection slide caused by concerns about the fiscal impasse.

The S. P. is now about 1.5 percent below its level on Nov. 6. In mid-November it was down as much as 5 percent.

Bill Gross, the managing director of the fund manager Pimco, told investors that they should expect annualized bond returns of 3 to 4 percent in the future and stock returns that are “only a few percentage points higher.”

The S. P. 500 has risen 12 percent this year. High debt and slowing global growth will weigh on the economy, Mr. Gross said.

Interest rates were flat. The Treasury’s benchmark 10-year note rose 5/32, to 100 6/32 and the yield slipped to 1.60 percent from 1.62 percent late Monday.

Among other stocks making big moves, Big Lots, the discount retailer, gained $3.23, or 11.5 percent, to $31.27 after raising its full-year earnings forecast and reported a loss that was not as bad as analysts had expected.

Pep Boys fell $1.11, or 10.4 percent, to $9.57 after posting a loss on weak sales and rising costs at its auto stores.

MetroPCS fell 81 cents, or 7.5 percent, to $9.96 after Reuters reported that Sprint is not considering making a counteroffer for the cellphone business. MetroPCS and T-Mobile said in October that they had agreed to combine their businesses.

Article source: http://www.nytimes.com/2012/12/05/business/daily-stock-market-activity.html?partner=rss&emc=rss