N.Y. Fed Backing Boosts Pimco Push For Mortgage Buybacks

The Federal Reserve Bank of New York joined with the biggest bond investors in the U.S. in seeking to force Bank of America Corp. to buy back bad home loans packaged into securities as the battle over who will bear mortgage losses intensifies.

The institution joined a group including Pacific Investment Management Co., BlackRock Inc. and Freddie Mac in a letter to the lender and to Bank of New York Mellon Corp., trustee for $47 billion of bonds created by Bank of America’s Countrywide Financial Corp. unit, people familiar with the matter said. Countrywide failed to service loans properly, law firm Gibbs & Bruns LLP said in a statement that didn’t name the firms.

The action follows foreclosure freezes that drove bank stocks lower this month as shareholders reconsidered the risks of home loans sold before the housing crash. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc., and its participation may raise the odds of prevailing against Bank of America, said Scott Buchta of Braver Stern Securities LLC.

“Individual investors have been trying for years to get these big banks to buy back loans at par, and haven’t had a lot of luck,” said Buchta, head of investment strategy for the New York-based securities firm. The New York Fed “in your corner, that adds weight and might give you a better chance for success.”

Normal Channels

At the same time, the letter shows the regulator must still “go through the normal channels,” he said.

Freddie Mac competitor Fannie Mae joined a separate, larger consortium of bondholders collaborating through a different Texas lawyer, people familiar with matter said last month. In July, the regulator for both government-controlled mortgage companies issued 64 subpoenas seeking information on loans backing securities they bought.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group represented by Gibbs & Bruns, which has since expanded. Countrywide’s servicing failures may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer.

“We now are in a position where we have to start a clock ticking,” Patrick said in a telephone interview.

If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide, which Bank of America bought in 2008, in default on its servicing contracts, Patrick said.

What’s Next

In its role as a mortgage seller, Countrywide should face more repurchase demands no matter what, Patrick said. The requests may come directly from bondholders or from the loan servicing arm of Countrywide itself or from Bank of New York, which acts as trustee of the bonds.

Patrick represents investors who own at least 25 percent of so-called voting rights in the deals and stand to recover “many billions of dollars,” she said.

MetLife Inc., the biggest U.S. life insurer; Western Asset Management Co., the biggest unit of Legg Mason Inc.; BlackRock, the world’s largest money manager; and Pimco, which runs the biggest bond fund, are all part of the group Gibbs & Bruns represents, the people said. TCW Group Inc., the manager of $110 billion in assets, expects to join, they said.

Faulty Appraisals

The investors are among those who want lenders to buy back home mortgages that they say were marketed using misstatements about their quality. One problem can be faulty appraisals that overvalued homes. That matter is separate from an investigation by 50 state attorneys general into whether loan servicers may have improperly foreclosed on homes.

While failing to include documents needed for foreclosures violates so-called representations and warranties by mortgage sellers, it probably won’t be the most common issue discovered if investors can access loan files, Isaac Gradman, a San Francisco-based consultant, said yesterday.

“It’s surprising that it took this foreclosure crisis to bring the issue to people’s attention but people are starting to get it,” said Gradman, formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin. He represented mortgage insurer PMI Group Inc. in a settled lawsuit over similar issues against General Electric Co. and its defunct mortgage unit.

Countrywide’s Obligations

Countrywide hasn’t met its contractual obligations as a servicer because it hasn’t asked for loan repurchases, is failing to keep adequate records, and is taking too long with foreclosures, Patrick said. The delays stem from missing documents, process mistakes and insufficient staffing to evaluate borrowers seeking loan modifications, she said.

If Countrywide doesn’t correct the servicing problems within a few months, her clients could have the right to pursue legal action against Bank of America, Bank of New York or both, she said. “None of the bondholders are opposed to modifications for deserving borrowers, but you’ve got to get it done” in a timely fashion, she added.

“The letter states a demand directed to Countrywide to cure the defaults,” said Kevin Heine, a spokesman for BNY Mellon. “It does not ask BNY Mellon to take any action. BNY Mellon will continue to perform its duties as trustee.”

Charlotte, North Carolina-based Bank of America will “defend our shareholders” by disputing any unjustified demands it buy back defective mortgages, Chief Executive Officer Brian T. Moynihan said yesterday.

BofA’s Response

Most claims “don’t have the defects that people allege,” Moynihan said on Bloomberg Television, referring to so-called put-backs, in which guarantors or investors in mortgage-backed securities ask for the return of bad loans. “We end up restoring them, and they go back in the pools.”

Jeffrey V. Smith, a spokesman for the New York Fed, declined to comment.

In August, Jack Gutt, another spokesman, said the institution was involved in “multiple efforts related to exercising our rights as investors,” which would “support our primary goal of maximizing the value of these portfolios on behalf of the American taxpayer.”

Mark Porterfield, a spokesman for Newport Beach, California-based Pimco; Brian Beades, a spokesman for New York- based BlackRock; and Peter Viles, a spokesman for Los Angeles- based TCW, declined to comment. John Calagna, a spokesman for New York-based MetLife, also declined to comment. Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, declined to comment. Michael Cosgrove, a spokesman for McLean, Virginia- based Freddie Mac, didn’t immediately return messages today.

Reviewing Letter

“We continue to review and assess the letter, and have a number of question about its content, including whether these investors have standing to bring these claims,” Bank of America Chief Financial Officer Charles H. Noski said yesterday on a conference call with analysts. “We continue to believe the servicer is in compliance with the servicing obligations.”

The letter, covering 115 separate mortgage securitizations, with $105 billion in original balances, came from “eight investors purportedly owning interests in these transactions,” Noski said.

Banks’ costs from repurchasing mortgages in securities without government backing may total as much as $179.2 billion, Compass Point Research and Trading LLC analyst Chris Gamaitoni estimated in August, including expenses related to lawsuits against bond underwriters.

JPMorgan’s Cost Estimate

JPMorgan Chase & Co. analysts said in an Oct. 15 report the costs may reach $80 billion, reduced in part by the difficulty investors have getting trustees to act and a typical requirement that misstatements about loan quality must be “material.”

Losses on the mortgages packaged into bonds come amid “persistently high unemployment and other economic trends, diminishing the likelihood that any loan defect, should one exist at all, was the cause of the loan’s default,” Noski said.

The initiative covered by the letter sent to Bank of America and BNY Mellon yesterday is separate from the effort coordinated through Dallas lawyer Talcott Franklin, Patrick said. That firm is coordinating action for a larger group of mortgage-bond investors holding more than $500 billion.

Participants in that so-called RMBS Investor Clearing House include BlackRock, Pimco, Fortress Investment Group LLC, Fannie Mae and Federal Home Loan Banks, people familiar with the matter said last month. MetLife isn’t part of that group, Calagna said.

Separate Effort

Membership in the clearing house has risen to 110 from 65, during the last two weeks, said Bill Frey, head of Greenwich, Connecticut-based securities firm Greenwich Financial Services LLC. Frey this month lost a lawsuit against BofA seeking to force the bank to purchase any modified loans out of bonds.

The New York Fed is “in a unique, potentially sticky position,” said Joseph Mason, a professor of finance at Louisiana State University in Baton Rouge.

“The Fed does have this authority to work with confidential consumer data,” he said. “But I think to use that authority to then bring suit while wearing their other hat here as a lender of last resort and bailout authority would be untoward at best.”

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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