Unsheathing Excalibur by Britton LaRoche

Bank of America was just getting over having the New York Attorney General step in on their settlement with Countrywide investors over mortgage bonds, when Delaware’s AG decided to join in.

Delaware Attorney General Beau Biden also intends to intervene in the Bank of America case, Ian McConnel, a deputy attorney general at the office, said at a court hearing today about the agreement. Delaware public pension funds may be investors in the Countrywide bonds and some of the trusts in the settlement were established under Delaware law, McConnel said in an interview after the hearing.

I’m sure you know that Beau is Vice President Joe Biden’s son. Shahien has more on this development.

Biden and Schneiderman have generally worked in concert in their investigation of the mortgage securitization markets, and since both states were unique and crucial to that effort, this additional intervention in the BofA settlement is no surprise. In fact, it was inevitable that someone, somewhere down the line would raise their hand and explain that the financial industry committed massive fraud upon investors that calls into question practically every mortgage backed security sold during the bubble years. Adam Levitin calls this “unsheathing Excalibur.”

Schneiderman didn’t mince words. He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese) [...]

BNYM is putting on a brave face, but I don’t see how they have a leg to stand on in this. The last thing they really want to do is go to the mat on whether the loan documentation is up to snuff. It ain’t. The only questions are when they settle on this, what terms the settle on, and whether they can settle by themselves, without pulling CW/BoA into the deal. And if that happens, it sets the floor for settlements with the other major servicers.

Settlement would be a godsend at this point. Schneiderman is basically calling into question the entire securitization market, which subsequently calls into question ownership and standing to foreclose for most of the US residential housing market.  [cont'd.] If Bank of New York Mellon didn’t guarantee the conveyance of mortgages to the trusts, there’s far more reason to believe that this was standard industry practice during the bubble years, rather than an anomaly. And the prevalence of robo-signing and document fabrication just confirms that. You have an entire market, then, built on sand. And you have tens of millions of homes without a true owner.

Already, the Schneiderman decision is reverberating. Fannie Mae and Freddie Mac plan to hit Bank of America with more mortgage repurchases, raising more liability for them. And today, in the ultimate “I hope for mutual destruction” lawsuit, AIG sued BofA over representations and warrants on their mortgage bonds. They are seeking $10 billion on $28 billion in bonds. This is the largest number sought by a single investor, and it’s a direct piggy-back on what will come out in the settlement, should New York and Delaware be allowed to intervene. This brings the number in mortgage bond lawsuits up to $197 billion.

BofA, meanwhile, has seen its stock sink to a 52-week low, down 26% in a month. More important, from Shahien:

The cost to protect Bank of America’s bonds against default have surged more than 17 percent since last Friday, according to Markit.

It now costs $207,000 to protect $10 million of BofA’s debt, as of Friday’s close. Last week, it cost just $176,000. The price of credit protection generally increases as investor confidence deteriorates.

The death watch continues.