The Fine Print In BoAs $8.5B Settlement With Mortgage Bond Holders

By Big Tent Democrat, Section Economy
Posted on Wed Jun 29, 2011 at 07:44:11 AM EST
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PIMCO & Co. get $8.5B. Homeowners probably get harassed:

In addition, the deal will require Bank of America to improve its payment collection process by hiring specialists to focus on high-risk loans, and do a better job of tracking whether the bank is adhering to its own internal loan-servicing standards.

As long as Wall Street's happy, no problem? Consider Sheila Bair's comment in the article:

“Unresolved legal claims could serve as a drag on the recovery of the housing market,” Ms. Bair said. “The healing of the housing market is essential to the recovery of the broader economy.”

I respectfully disagree. Unresolved legal claims like the ones BofA settled are not the major drag on the economy that the homeowner crisis is causing - it is the depressed housing market and balance sheet problems homeowners face. That is what is depressing aggregate demand. PIMCO & Co. getting these billions will have no discernible impact on the economy or aggregate demand.

Speaking for me only

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The Fine Print In BoAs $8.5B Settlement With Mortgage Bond Holders | 34 comments (34 topical)

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You get it BTD (5.00 / 1) (#1)
by ruffian on Wed Jun 29, 2011 at 08:21:24 AM EST

In this settlement BofA is implicitly admitting they misled the investors. When is someone going to make them admit that the same behavior that made the investors think the mortgage securities were a good investment also made the borrowers think their homes had some value?

I'm glad investors are getting something and now they can spread that money around in other parts of the economy. It will not go to help the housing market however because people simply do not have the resources to buy houses when the ones they already bought at fraudulently inflated prices are dragging down their personal balance sheets. Anyone that could afford to buy a house has already taken advantage of the low interest rates and low prices over the last couple of years - they were not waiting for more investors to be able to get back into the market.

Seriously... (5.00 / 1) (#2)
by kdog on Wed Jun 29, 2011 at 08:28:43 AM EST

Can't see how gamblers getting their money back after making poor wagers is gonna help the economy at large. Might give gamblers the opportunity to make the next bad bet in their favorite crooked casino, but it ain't gonna give broked*cks the money to buy a starter home, or get them above water on the hose they overpaid for in 2006.

Now if BofA had to cough it up to borrowers via mortgage loan modification, that might do some good.

Yup (none / 0) (#3)
by ruffian on Wed Jun 29, 2011 at 08:34:59 AM EST

They may go off and invest in something productive, but most likely they will find the next high stakes crap shoot.


Nobody is looking to gamble... (none / 0) (#4)
by kdog on Wed Jun 29, 2011 at 09:09:12 AM EST

on a new factory stateside anymore, maybe offshore...again, not much help.

Mainly the modern gambler is looking for the quick score, and Wall St is happy to oblige for a commission.

Not that there is anything wrong with going for the quick score...thats why I like playing the Pick 6. But with the Pick 6, nobody gets hurt except maybe the gambler...when ya look for the quick score in housing or energy, millions or billions of people can get hurt, and/or an entire economy goes down in flames.

If a gambler wants to gamble in a way that could help the economy and country, they need to bypass Wall St and go right to the entrepenuer with a good idea in need of seed money.


Right, nobody is building in the (none / 0) (#9)
by me only on Wed Jun 29, 2011 at 09:22:40 AM EST

US.


I stand corrected... (none / 0) (#12)
by kdog on Wed Jun 29, 2011 at 09:31:01 AM EST

not enough are looking to build in the US.

I believe we're still at a big net loss on manufacturing jobs over the last 50 years.


Jobs, of course (none / 0) (#13)
by me only on Wed Jun 29, 2011 at 09:46:19 AM EST

we are at a net loss. Automation has changed manufacturing. The days of the Rouge River plant are gone.

There are also issues with people being willing to work rotating 12 hour shifts irregardless of holidays.


If the pay is good... (5.00 / 1) (#14)
by kdog on Wed Jun 29, 2011 at 09:59:02 AM EST

people will work 12 hour shifts and holidays.

Automation is part of it, so is outsourcing and trade deficits.


No, they won't (none / 0) (#15)
by me only on Wed Jun 29, 2011 at 10:24:30 AM EST

seriously, they won't. I sat across the hallway from an operations manager while he fired five people who just couldn't be bothered to answer their cellphones during the week of Christmas. Not Christmas Day, but the week between Christmas and New Years.


Wal-Mart, McDonald's... (5.00 / 1) (#16)
by kdog on Wed Jun 29, 2011 at 10:37:44 AM EST

they're staffed on Holidays....sounds like those 5 who got canned ain't hungry.


Wal-Mart is not open (none / 0) (#17)
by me only on Wed Jun 29, 2011 at 10:50:51 AM EST

on Christmas. Wal-Mart/McDonals do not have rotating 12 hour shifts. McDonald's is not open 24/7. Most are not open Christmas.

McDonald's and Wal-Mart can run a person short. It might create lines, but the plant doesn't shut down. Operating facilities have safety issues. Many cannot operate short.

Operating plants must run. If it snows you stay the night. If there is a turnaround you might be there 30 straight hours, doesn't matter if your kid is graduating. Flex time? Uh, no.

People quit because of this stuff. Even with this unemployment level in the country I know a bunch of job openings.


How 'bout nurses? (none / 0) (#19)
by kdog on Wed Jun 29, 2011 at 11:08:14 AM EST

They gotta stay when it snows, get called in on holidays and off days...they do it cuz the pay is right.

What are those job openings paying? Nobody is gonna put up with such job demands unless its worth the effort, or their hungry.

I don't deny Americans can run fat and lazy and spoiled, but a bigger part of it in my opinion is the larger slice of the pie the executives have been taking. If the CEO is only making ten or 15 times the guy on the line people will do it...when executives are making 100 times the guy on the line says to himself "why am I killing myself to make millions for those pricks?"


Most nurses can live in nice (none / 0) (#21)
by me only on Wed Jun 29, 2011 at 12:56:27 PM EST

places. NY (isn't that where you live?) has plenty of hospitals. Bayway is in Linden. The plants that I know of needing people are in nowheresville. The environmental movement has caused most heavy industry to close facilities near big cities (if you ever wonder why Houston is growing, it is because they still allow plants to be built in the area).

Last I looked people are not hoping to live in Big Spring, Texas working Christmas.


A harder sell... (5.00 / 1) (#26)
by kdog on Wed Jun 29, 2011 at 01:26:54 PM EST

to be sure, but again if the money is right people will deal with working Christmas in West Bubblef*ck.

My uncle worked in India, worked in Indonesia...hated it, his family especially hated it. But his outfit made godfather offers that he couldn't refuse.

The million dollar question is what wages they're offering to start and what skills are required...if they pay well, workers will come.


: About $20/hour (none / 0) (#28)
by me only on Wed Jun 29, 2011 at 04:45:44 PM EST

to start. Manufacturing has to compete on a worldwide market. Your local restaurant not too much.

Rotating 12 hour shifts? (none / 0) (#20)
by sj on Wed Jun 29, 2011 at 11:36:35 AM EST

I think there is something wrong right there. It used to be that a 24-hour shop fulfilled that requirement by having three 8 hour shifts.

That's worker abuse in "productivity" sheep's clothing.


24/7 (none / 0) (#23)
by me only on Wed Jun 29, 2011 at 01:03:07 PM EST

3 - 8 hour shifts doesn't work for 24/7. That only works for 24/5. Most plants today run 4 shifts of 12 hours. Here


I worked at a 24/7 shop (none / 0) (#24)
by sj on Wed Jun 29, 2011 at 01:11:35 PM EST

Which functioned admirably on 3 shifts. Rotation was done quarterly (and also on a "bid" basis if someone wanted to work 2nd or 3rd shifts which came with a differential) so that home life could establish a routine (wrt daycare, etc).

Your link doesn't say 3 8hr shifts don't work. It only describes the 12 hour rotating. Which would play he!! on family life.


I didn't say it doesn't work (none / 0) (#25)
by me only on Wed Jun 29, 2011 at 01:25:20 PM EST

I am telling you what is the norm in the industry.

Guessing that part of the issue is that management wants to see the shifts in operation.


Actually you DID say (none / 0) (#27)
by sj on Wed Jun 29, 2011 at 01:31:59 PM EST

that it doesn't work. Check out your own comment.

As far as what is the norm in the industry? The environment these last 10 years hasn't been exactly worker friendly, so I'm not surprised.


Three 8 hour shifts (none / 0) (#29)
by me only on Wed Jun 29, 2011 at 04:50:02 PM EST

doesn't work. That accounts for 5 days of the week.

8 hour shifts can work, just not three of them. Some hospital work something called modified Baylor on the weekends. I don't know any operating plants that do that. Operating plants prefer less shift changes per day. Less hassle, less to go wrong.

I've been in the industry 20 years. I haven't seen a change in shifts.


What are you TALKING about (none / 0) (#31)
by sj on Wed Jun 29, 2011 at 06:34:53 PM EST

First you say it doesn't work. Then you say you never said that. Then you say it again.

Whatever.


: This must be a term issue (none / 0) (#33)
by me only on Wed Jun 29, 2011 at 07:29:52 PM EST

A shift is a group of people that work certain hours/days. In the scheme I linked, there are four shifts (you might call this a crew), they cover the 168 hours in a week.
Some police and fire departments also use this schedule. It is not a novel idea.
In a 8 hour shift scheme you have to have one group rotate almost daily between morning/evening/night or use modified Baylor.

And excuse me? (none / 0) (#32)
by sj on Wed Jun 29, 2011 at 06:35:53 PM EST

So weekend days don't have 24 hours?


They are eventually going to have to do (none / 0) (#6)
by Militarytracy on Wed Jun 29, 2011 at 09:13:16 AM EST

that for all of us now. Property values are really going to deteriorate now in this long term economic reality.


it's so hard to buy a house, (5.00 / 1) (#7)
by cpinva on Wed Jun 29, 2011 at 09:17:05 AM EST

when you're unemployed. funny thing, people (and banks) actually expect you to pay for the house.

go figure.

Then again... (none / 0) (#8)
by kdog on Wed Jun 29, 2011 at 09:20:34 AM EST

People (and bookies) always expected gamblers to pay up when they lose a wager, and not try to weasel out.

So nothing is set in stone CP, if the rules of gambling can change, so can the rules of home buying. Anybody wanna go to a Squatter Party?


: true enough, (none / 0) (#30)
by cpinva on Wed Jun 29, 2011 at 05:16:11 PM EST

but i've never heard of a non-performing home mortgage resulting in broken knee caps. having said that, i'll now go check the evening news.

I wonder how they arrived at the 8.5B total (5.00 / 1) (#10)
by ruffian on Wed Jun 29, 2011 at 09:25:05 AM EST

Would be interestng to see how much bad debt there actually was, and what kind of a haircut Pimco agreed to.

Me too (none / 0) (#11)
by Militarytracy on Wed Jun 29, 2011 at 09:27:00 AM EST

We'll probably die waiting for it though. Knowing those facts could affect investor confidence :)


Maybe this helps to answer (none / 0) (#18)
by Anne on Wed Jun 29, 2011 at 11:04:23 AM EST

at least some of your question:

After several articles leaked announcing that Bank of America would settle with investors on soured residential mortgage backed securities, BofA went ahead and made the announcement. As assumed in the reports, BofA will pay $8.5 billion to a group of institutional investors to settle claims that the bank violated the representations and warranties when they sold the RMBS. They will additionally, according to their press release, "record an additional $5.5 billion provision to its representations and warranties liability for both Government-Sponsored Enterprises (GSE) and non-GSE exposures in the second quarter of 2011." So that's a total of $14 billion.
What's most interesting here is that Bank of America makes this settlement with the trustee for the trusts, the Bank of New York Mellon. And they're claiming that this will resolve almost all of their Countrywide-issued RMBS, which had an original unpaid principal balance of $424 billion.
The claim arose not from a lawsuit, but from a letter written by some large institutional investors, like Black Rock and Pimco, who argued that BofA violated the representations and warranties of the RMBS. But that did not cover every investor of every Countrywide-issued security. The trustee is taking a huge risk in representing the interests of every investor. This could open them up to exposure, if an investor believes that they didn't get the best deal in the settlement. One experienced observer told me, "In fact, the trustees usually require investors seeking trustee action to provide indemnification before the trustee takes any actions at all. Would this mean the investor group is indemnified the trustee for any potential claims from other investors?"
If this holds, and all $424 billion is settled, that would represent 2-3 cents on the dollar. It would be a pretty raw deal for the investors, considering that Countrywide has been accused of not following procedures of conveying assets to the trusts, creating "non-mortgage backed securities." Yves Smith has argued that these cases are incredibly hard to prove in court, but even she expected a settlement avoiding trial to cost in the range of 10-15 cents on the dollar. It seems like the bank is trying to sucker the public into believing that they are making a major concession with a giant settlement, when they would be wrapping up a lot of their legacy exposure relatively cheaply.

And here's an excellent post on this from Yves Smith.

Looks like a good deal for BoA - for investors, maybe not so much.


: I think Yves is wrong (none / 0) (#22)
by Big Tent Democrat on Wed Jun 29, 2011 at 01:00:08 PM EST

No one is redeeming their bonds here I don't think, just settling potential claims.
If the bonds are completely worthless, then her numbers makes sense.
I assume they aren't.

: Thanks a lot Anne (none / 0) (#34)
by ruffian on Wed Jun 29, 2011 at 07:44:37 PM EST

I didn't have time to look into it today. Will check out Yves.

Well, you can't have PIMCO taking a hit (none / 0) (#5)
by Militarytracy on Wed Jun 29, 2011 at 09:10:11 AM EST

The world would explode then, or so I am told. But yes, this does not affect the home owner to mortgage chaos. This only affects the failing mortgage backed security to investor chaos and has nothing to do with trying to sell houses for what is owed on them or trying to a pay a mortgage with no job.