The legacy of fraud from Countrywide Financial continues. The Associated Press is reporting that Bank of America will pay $8.5 billion–that’s right, BILLION–to settle claims by purchasers of mortgage-backed securities. Investors had alleged that Countrywide (which was bought by Bank of America) sold them poor mortgage-backed securities that lost a substantial amount of their value.
Now, what exactly are these “mortgage-backed securities” that were the subject of these claims and, perhaps more importantly, how does this impact homeowners? Your mortgage loan has most likely been pooled together with thousands of other mortgage loans into a special entity called an asset-backed trust (which is a type of “special purpose vehicle”). These trusts exist solely to receive income from mortgage payments, and then distribute the proceeds to owners of the trust (i.e. the “certificateholders”). Bank sold “certificates” on the trust, which is kind of like selling shares of stock in it. Investors would buy these certificates as a type of investment, with hopes that they would receive a return in the form a distributions (made from the mortgage loan income the trust received).
The trusts, and the Wall Street banks that set them up, were supposed to follow certain protocol and risk management procedures, as these were investment securities. Insurance companies, pension funds, municipalities, and many other investors bought these certificates, believing they were good investments. After all, the investors were counting on Countrywide loans–and what company was hotter in the mid-2000’s than Countrywide?
Well, hindsight has shown us that Countrywide wasn’t as squeaky clean as they once appeared. They had questionable loan procedures and made thousands upon thousands of bad loans. Which means investors in the pools of these bad loans lost billions and billions of dollars. Not just Wall Street investors, but pension funds, too, that contained the retirement savings of millions of hard-working Americans.
I’m sure one of the terms of this $8.5 BILLION settlement is that Bank of America will deny any culpability or guilt. That’s typical of any settlement–standard lawyer operating procedure. However, no company agrees to pay out that enormous sum of money without some risk of liability.
Now, what does this mean for homeowners? In my opinion, it’s further confirmation of what I’ve already been preaching–you have to take control of your own destiny and don’t rely on the bank to look out for your best interests. No modification or workout is final until it is signed in writing, and you can (and will) be foreclosed on while the process is pending. Countrywide was willing to make loans they knew (or reasonably should have known) borrowers would never be able to repay. Why? Because repayment didn’t matter to them. They packaged up the loan and sold it off to someone else, who eventually bore the risk of homeowners not being able to repay the loan. On the one side, they screwed homeowners by selling them something they couldn’t afford. And on the other side, they screwed investors by packaging up and selling bad securities.