Let's Set the Record Straight on Bank of America: Open the Books!

If you currently use BoA, I'd recommend you be careful.

regards,
-Lance


http://www.huffingtonpost.com/william-k-black/yes-lets-set-the-record-s_b_779031.html

William K. Black and L. Randall Wray
Posted: November 4, 2010 06:06 PM

Let's Set the Record Straight on Bank of America: Open the Books!

While we welcome Bank of America's response to our two-part essay,
"Foreclose on the Foreclosure Fraudsters," it does not actually respond to
any of the facts or analytical points we made. Indeed, it does not engage
the issues we raised. Bank of America's response contains some useful data
on foreclosures that supports points we have made in prior articles, but
overwhelmingly it is a plea for sympathy; Bank of America says it is beset
by deadbeat borrowers and it is distressed that it is criticized when it
forecloses on their homes. Bank of America portrays itself as the victim
of an ungrateful public.

Bank of America Should be Placed in Receivership NOW

We argued that the FDIC should place Bank of America in receivership and
the federal banking agencies should impose a moratorium on foreclosures
until the mortgage servicers correct their systems, which currently often
rely on massive fraud and perjury. There can be no assurance that
foreclosures are lawful until the banks actually find the mortgage "wet
ink" notes signed by debtors to prove they are the true beneficial owner
of the mortgage debts, which is required to seize property. We also called
on the banks to identify and compensate homeowners who were fraudulently
induced to borrow by the lenders and their agents through a number of
fraudulent practices variously marketed by lenders as "no doc", liar, and
NINJA loans (all subspecies of what the industry aptly called "liar's"
loans).

We showed that outside studies by a wide range of parties showed massive
fraud by the bank.

The demands by investors that Bank of America repurchase loans and
securities sold under false "reps and warranties" may cause exceptional
losses if those making the demands document the broader fraud by the
lenders. The article "Bank of America Resists Rebuying Bad Loans" shows
that Bank of America's potential loss exposure to Fannie and Freddie is
staggering: "[Bank of America] said it sold $1.2 trillion in loans to the
government-controlled housing giants from 2004 to 2008 and has thus far
received $18 billion in repurchase claims on those loans."

The company is fighting the groups that are demanding that it repurchase
the toxic mortgages. Its CEO, Brian Moynihan counters their claims with
the following analogy:

Such investors are like "people who come back and say, 'I bought a Chevy
Vega, but I want it to be a Mercedes with a 12-cylinder [engine],'" Mr.
Moynihan said in October. "We're not putting up with that."

One-third of its subprime business is in default and Mr. Moynihan thinks
Countrywide was selling Vegas? If one third of Vegas crashed and burned
within three years of being purchased the metaphor might be apt and
completely incriminating. We argued that putting Bank of America into
receivership is the proper remedy for its substantial violations of the
law and for its continuing reliance on unsafe and unsound practices.
Outside reviews have documented the most extensive and financially harmful
violations of law and unsafe banking practices and conditions in history.

As argued in a recent article by Jonathon Weil, the bank is nearing a
"tipping point" as markets recognize it is "cooking the books," vastly
overstating the value of its assets as it refuses to recognize the true
scale of losses on its purchase of Countrywide. Ironically, it still
carries on its books $4.4 billion of fictional "goodwill" value created by
overpaying for Countrywide (a notorious control fraud), as well as $142
billion of home equity loans that are worth far less. A more honest
accounting of "good will" and of the value of home equity loans would take
a big bite out of Bank of America's market capitalization ($116 billion),
which has lost 41 percent of its value since April 15. The markets are
moving ever closer to shutting down the institution, but Moynihan is not
"putting up with" the demand by investors for Bank of America to come
clean on its fraudulent practices.

Ms. Mairone's Response Verifies Our Claims

Rebecca Mairone replied on behalf of Bank of America to our two-part post.
Step back for a moment and consider the context of Bank of America's
response. We cite evidence that the bank has committed massive fraud,
explain that this provides a legal basis for placing it in receivership,
and call on the FDIC to do so. Bank of America chooses to respond
publicly, but its response never contests its massive fraud or our
demonstration that there is a legal basis for placing it in receivership.

Instead, Bank of America complains that we "do nothing to illuminate the
challenges [BofA's home mortgagees] face." This is not our task;
nevertheless, the claim is incorrect. We illuminate the problems posed by
the fact that nonprime borrowers were frequently victims of mortgage fraud
perpetrated by lenders as well as many other operatives in the
unprecedented criminal lending and securities fraud of the past decade.
This problem is typically ignored -- at least by the financial sector and
the mainstream media -- so we did "illuminate" the problem and the cause
of action borrowers could bring for "fraud in the inducement."

We showed that the fraudulent senior officers that controlled home
mortgage lenders created "liars," and NINJA loan programs designed to
induce millions of Americans to take out loans they could not afford to
repay. The endemic underlying fraud in the origination and sale of
nonprime loans is critical to understanding why loan defaults are massive,
why borrowers were typically the victims of the fraud and lost their
meager savings due to the frauds, why loan modifications typically fail,
and why foreclosure fraud has been so common. The endemic fraud also
hyper-inflated the bubble and helped cause the economic crisis and severe
loss of employment. Over a million Bank of America borrowers face these
"challenges" that we "illuminated."

Bank of America's response is guilty of what it criticizes; it ignores the
fraud by nonprime lenders and sellers, particularly Bank of America's
frauds in both capacities. It does not seek to "illuminate" the frauds or
the problems that arise from endemic mortgage fraud. We did not invent the
"epidemic" of mortgage fraud. The FBI began testifying about that in 2004.
The FBI predicted that it would cause a "crisis" if it were not stopped --
and no one claims it was stopped. The mortgage industry's own fraud
experts opined publicly in 2006 that the type of loans that Countrywide
decided to elevate to its favored product was an "open invitation to
fraudsters" and fully deserved the phrase that the lenders used to
describe the product: "liars' loans". (Bank of America chose to purchase
Countrywide at a time when it was notorious for the awful quality of its
mortgage loans.) It is the lenders and their agents, the loan brokers,
that directed the lies in these liar's loans and appraisals and it was the
lenders that made fraudulent "reps and warranties" in order to sell the
fraudulent loans on to others in the form of securities. Economists and
white-collar criminologists share a belief in "revealed preferences." The
senior officers that control lenders provide an "open invitation to
fraudsters" in the midst of an "epidemic" of fraud because they intend to
profit from those frauds.

Instead of contesting its issuance and sale of massive numbers of
fraudulent loans, Bank of America writes to provide data on delinquencies
and foreclosures in support of its claim that it is the victim of
Countrywide's deadbeat borrowers who it tries in vain to help. Bank of
America's data, however, add support for the evidence of widespread
mortgage fraud, particularly by Countrywide. Accounting control frauds
maximize their (fictional) reported income by lending routinely to those
who cannot afford to repay their loans. It is this aspect of the fraud
scheme that is most counter-intuitive to those that do not study fraud,
but to criminologists it provides the most distinctive markers of fraud.
The senior officers that control fraudulent lenders maximize the bank's
reported short-term income, in order to maximize their compensation, by
growing extremely rapidly through making loans at a premium yield. This
strategy creates a "sure thing" (Akerlof & Romer 1993). The lender is sure
to report record (fictional) profits in the short term and suffer enormous
(real) losses in the longer term.

The Evidence Supports Our Claims of Fraud

If we are correct that Countrywide operated as a fraud we would expect to
find the following:

disproportionately large rates of loan delinquencies and defaults
huge losses upon default, and
fraudulent representations and appraisals.
We would also predict widespread fraud in the "reps and warranties" that
Countrywide and Bank of America provided to purchasers of nonprime loans
originated by Countrywide. As we emphasized in our initial posts, a wide
range of financial entities have confirmed the widespread fraud in the
reps and warranties. This is why Bank of America is being sued. The data
they provided in its response to our blogs supports the first three
predictions.

First, Bank of America admits to a 14 percent delinquency rate on its
mortgages. That percentage is roughly seven times greater than the normal
delinquency rate for prime loans. It is roughly three times the
traditional rule of thumb for a fatal delinquency rate (5 percent) for a
home lender. Losses upon default during this crisis are dramatically
greater than the historic percentages, and loss reserves were at historic
lows, so the traditional rule of thumb for fatal losses is unduly
optimistic in this crisis.

Second, Bank of America's response states that Countrywide-originated
loans have caused 85 percent of total delinquencies. Bank of America was a
massive mortgage lender before it acquired Countrywide, so taken together
these data suggest that the delinquency/foreclosure rate for
Countrywide-originated mortgages must have been well over 20 percent --
over ten times the normal delinquency rate and four times the traditional
rule of thumb for fatal losses. These exceptionally large rates of
horrible loans, defaulting so quickly after origination, are a powerful
indicator that Countrywide was engaged in accounting control fraud.
Unfortunately, lenders that specialized in making nonprime loans were
typically fraudulent. The result was a massive bubble and economic crisis.

Our conclusions are well-supported by many other analyses, many of which
were conducted long ago. For example, Reuters reported in January 2008
that one-third of Countrywide's subprime mortgages were already
delinquent:

(Reuters) - Countrywide Financial Corp CFC.N, the largest U.S. mortgage
lender, on Tuesday said more than one in three subprime mortgages were
delinquent at year-end in the $1.48 billion portfolio of home loans it
services.
Countrywide said borrowers were delinquent on 33.64 percent of subprime
loans it serviced as of December 31, up from 29.08 percent in September.

Foreclosures are now vastly more common and the losses lenders suffer upon
foreclosure, particularly for nonprime loans, are catastrophic. For
example, Bloomberg reported at the end of 2009 that foreclosures result in
losses amounting to nearly three-fourths of the value of the loan:

For subprime loans, losses averaged 73 percent for a foreclosure compared
with 59 percent for a short sale, Amherst [Securities Group LP] reported.
Third, Bank of America's data indicate another form of deceit that is a
typical consequence of accounting control fraud. Bank of America has
delayed foreclosing, sometimes for years, on large numbers of loans that
have no realistic chance of being brought current, even with the loan
modifications it offered. This behavior would be irrational for an honest
lender, for it would increase ultimate losses, but is a typical strategy
for a lender controlled by fraudulent senior officers because it greatly
delays loss recognition and allows them to extend their looting of the
bank for years through bonuses paid on the basis of fictional reported
"profits" after the bank has (in economic substance) failed. Bank of
America's response to us admit that, of their 1.3 million customers who
are more than 60-days delinquent, 195,000 have not made a payment in two
years. Of those loans which have not received a payment in two years,
56,000 are already vacant.

For the foreclosure sales in the period from Jul-Sep, 2010:
80 percent of borrowers had not made a mortgage payment for more than one
year

Average of 560 days in delinquent status (approximately 18 months)

33 percent of properties were vacant
The traditional rule of thumb is that a home loses 1.5 percent of its
value each month it is delinquent but not foreclosed and sold. Those
losses are far greater when the property is vacant. The loss of value is
not limited to the particular home; all homes in the neighborhood are
harmed when homes are left vacant for long periods. Bank of America does
not address this issue, but the time from foreclosure to sale has also
grown dramatically, which means that the length of time that foreclosed
homes remain vacant prior to sale has grown substantially. The industry
calls this huge number of homes, which are not producing income to the
lenders because of the extraordinary growth in delinquencies and the delay
in sales even after foreclosure, the "shadow inventory." Note that none of
the government foreclosure relief programs mandated that Bank of America
sit on these delinquent assets for an average of 18 months and allow them
to be wasting assets.

The bank's response primarily criticizes its borrowers as deadbeats, yet
the data it provides support points we have made in our prior posts,
including Bill Black's posts about the banks working with the Chamber of
Commerce and Chairman Bernanke to extort the Financial Accounting
Standards Board (FASB) in order to destroy the integrity of the accounting
rules requiring banks to recognize losses on their bad loans. We have
explained why the fraudulent officers controlling many lenders followed a
strategy of making bad loans at premium yields in order to maximize
(fictional) accounting income and their bonuses. This dynamic drove the
current crisis. These frauds hyper-inflated the housing bubble and caused
trillions of dollars of losses.

The extortion of FASB was successful; Bank of America was one of the
leaders of that extortion. It changed the accounting rules so that banks
could often avoid recognizing losses on these fraudulent loans, until they
actually sold the home taken back through foreclosure. This dishonorable
accounting fiction creates perverse incentives for banks to do exactly
what Bank of America has done -- let bad assets waste away and make
already severe losses catastrophic.


-- 
dadl-ot mailing list
http://mail.thehood.us/mailman/listinfo/dadl-ot_thehood.us
http://news.gmane.org/gmane.music.dadl.ot