Ratings agency Moody’s Investors Service downgraded Bank of America Corp. (BAC), chopping the rating for long-term debt from A2 to Baa1, with a negative outlook, leaving the short-term rating untouched for the time being.
Moody’s suspects that the U.S. government will no longer be that eager to bail out problem banks, as the financial crisis is not as acute, and the problem of other banks following suit and failing is no longer at issue.
“The downgrades result from a decrease in the probability that the US government would support the bank,” said Moody’s in a Sept. 21 release.
For BAC and its subsidiaries, but especially its subsidiary Countrywide Financial Corp., troubles for deceptive residential loan modification and foreclosure practices continue to linger in court. Nevada’s and Arizona’s Attorney Generals’ offices filed lawsuits during December of 2010 in Clark County District Court and Maricopa County Superior Court respectively.
“Bank of America has been the slowest of all the servicers to ramp up loss mitigation efforts in response to the housing crisis. It has shown callous disregard for the devastating effects its servicing practices have had on individual borrowers and on the economy as a whole,” accused Terry Goddard, Arizona attorney general, in a December 2010 press release.
In August, the Nevada attorney general’s office filed an amendment to its earlier filings, asking that a consent judgment entered on March 13, 2009, be terminated. The amended complaint alleged that Countrywide Financial Corp. materially violated the consent judgment and deceived its customers.
A consent judgment, which is issued by a judge, is an enforceable agreement between the parties to the lawsuit to resolve the matter without costly litigation.
The court filing alleges seven different types of misrepresentation, such as increasing interest rates on monthly payments, neglecting to provide relevant documentation, refusing to provide loan modifications, and not allowing its consumers sufficient time for completing relevant documentation.
The “complaint alleges that Bank of America’s misconduct cuts across virtually every aspect of its operations—from originating to servicing and, all too often, to foreclosing on the loans and homes of Nevada consumers,” according to an Aug. 30 press release by the Nevada State Attorney General’s office.
Spelling More Trouble
On Sept. 2, BAC and Countrywide Financial Corp. were charged along with a total of 17 financial institutions by the Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.), for violating federal security laws in respect to private-label mortgage-backed securities (PLS).
“Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs [Government-Sponsored Enterprises], as reasonable investors,” according to the FHFA filing.
The FHFA states in a published statement that financial institutions were responsible for Fannie Mae and Freddie Mac’s losses because of misrepresentation in the description of the hundreds of billions worth of PLS packages sold to the two housing finance giants.
“To be clear, Fannie Mae and Freddie Mac were investors in these PLS, not the originators of those securities,” according to the FHFA statement.
Legal experts suggest that the FHFA lawsuit is without merit, given that Fannie Mae and Freddie Mac were no greenhorns or newcomers to the mortgage investment market.
The FHFA responded to this suggestion in its statement: “Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold.”
Media reports put a price tag on the FHFA court filing, suggesting that the FHFA is angling for $196 billion, with BAC’s portion amounting to $6 billion and Countrywide’s to $26.6 billion.
The above potential recoveries are hogwash, responded the FHFA in its statement. To put a price tag on the outcome is impossible, as it all depends on the responses from the defendants, the evidence brought before the court, and the judicial findings.
Next…No Breather for BAC and Its Subsidiaries