What In The World Is Going On Inside Bank Of America?

by Dan Froomkin, Huffington Post, November 8, 2010

WASHINGTON -- You could do a lot worse things with your time than read every word of what William K. Black and L. Randall Wray have written for the Huffington Post in the last two weeks -- even though it would take a while.

Black and Wray both teach economics at the University of Missouri-Kansas City. Black, himself a regulator during the S&L scandal of the 1980s, has emerged as one of the most blistering critics of the Obama administration's limp response to the mortgage and foreclosure crisis. For an introduction, read my article on Black and his list of nine stories the press is underreporting - most of them involving fraud, fraud and more fraud.

In their first piece, back on Oct. 22, Black and Wray described how the ongoing foreclosure fraud epidemic is the work of precisely the same unrepentant bank officers whose fraudulent mortgage schemes crashed the financial system in the first place. They called on the FDIC to put some of the nation's biggest banks into receivership, in order to clean house. "Foreclose on the foreclosure fraudsters," they wrote -- and start with the worst: Bank of America.

I wrote a news story about their piece, I thought it was so important.

In part two, they called for a foreclosure moratorium, and explained why the guilt gets greater the higher you go in the mortgage fraud food chain - not the other way around.

Black, writing alone, also corrected President Obama's assertion during his interview with Jon Stewart, that chief economic adviser Larry Summers had done a "heckuva job." Summers did not resolve the financial crisis, Black wrote, he just papered over the problem. In another solo effort, Black warned that papering over the problem will actually increase the total cost of the crisis in the long run, and he concluded that "the administration's banking policies have attained the terrible trifecta: terrible economics, terrible ethics, and terrible politics."

After Bank of America executive Rebecca Mairone posted a largely nonresponsive rejoinder to Black and Wray's call for her bank's dissolution, the professors took to their keyboards again and wrote about how "[t]he bank's response primarily criticizes its borrowers as deadbeats, yet the data it provides support points we have made in our prior posts."

In her defense of BofA, Mairone noted that most of the bank's problem loans were made by Countrywide Financial, which Bank of America acquired in January 2008 -- well after the toxicity of its mortgage holdings had made the company and its practices notorious. Mairone casts the action as a heroic one, staving off a failure that "would have been devastating to the economy, the markets, and millions of homeowners." But Black and Wray argue that putting Countrywide into receivership would have been a much better option: "A receiver would have fired Countrywide's fraudulent senior leaders. Bank of America, by contrast, put them in leadership roles in major operations, including foreclosures, where they could commit continuing frauds." And Bank of America bragged at the time of having had more than 60 people doing "due diligence" on Countrywide before the acquisition. So they knew what they were getting into; or at least they should have known.

In the second part of their response to Mairone, Black and Wray called on Bank of America to come clean. And in that post, they raise some fascinating questions that all of us should be asking. Among them:

• How did you determine the losses in Countrywide's assets?
• How large were the market value losses at that time?
• How large are the market value losses now?
• Which members of the due diligence team were assigned to determine the incidence of fraud in various loan categories? What did they find?
• How large a sample of subprime and liar's loans did BofA's due diligence team review?
• What likely mortgage fraud incidence did BofA's due diligence team discover?
• What did they report to BofA with regard to fraud incidence?
• What changes in lending and personnel did BofA implement in response to these findings?
• What actions did BofA take in response to finding the incidence of mortgage and accounting/securities fraud?

Ambac Assurance sued Bank of America in September, saying Countrywide had fraudulently induced Ambac to insure bonds backed by loans that they knew had been improperly made. This came after Ambac's review of the underlying loans. Black and Wray ask:

• Ambac reviewed Bank of America's assets and reported a 97 percent rate of false reps and warranties. Has Bank of America done such a review?
• If so, who conducted the review, and what rate of false reps and warranties did they find?
• Does Bank of America agree that liar's loans have extremely high fraud rates?
• Does Bank of America agree that an honest secured lender would never seek to inflate an appraisal?
• Does Bank of America agree that a competent, honest secured lender would prevent others from frequently inflating appraised values?
• Does Bank of America agree that appropriate home mortgage underwriting can minimize adverse selection and produce a positive expected value to home lending?
• How many fraudulent mortgage loans made by Countrywide has Bank of America identified?
• What is Bank of America's procedure when it finds suspicious evidence of a fraudulent loan?
• How many fraudulent mortgage loans, by year, since 2000, have Countrywide and Bank of America identified.
• Has Bank of America reviewed Countrywide's nonprime loans for fraud incidence, fraud losses, and the incidence of lender fraud and fraud by the lender's agents? Please provide the results.
• What has Bank of America done to remedy the injuries that borrowers suffered through loan or foreclosure fraud by them or Countrywide?
• Does Bank of America agree that Countrywide's nonprime lending was often conducted in a manner that was unsafe and unsound?
• Does Bank of America agree that Countrywide's record keeping was not adequate and required substantial improvement?
• At current market value of its assets, just how insolvent is Bank of America?
• How much can the bank sell its toxic assets for in today's market?
• What is the value of mortgages and mortgage backed securities held by Bank of America for which it has no clear title?
• How many mortgage-backed securities has the bank sold to investors for which it does not hold the notes that are required?
• What is the bank's current estimate of losses it will suffer in court due to lawsuits by investors?
• The top four banks are holding $434 billion in second liens (good only if the first lien -- the mortgage -- is paid), and carrying these on their books at 90% of face value. What are Bank of America's reasonably expected losses on second liens against properties that are delinquent, in foreclosure, or likely to go into foreclosure?

As for the ongoing foreclosure crisis, in which it has become apparent that banks are forcing people out of their homes despite the absence of original, "wet ink" documentation, Mairone blamed the foreclosures on deadbeat borrowers, many of them unemployed, a third of whom no longer occupied their homes. Black and Wray asked:

• Does Bank of America hold the "wet ink" notes on any of these homes, as required by 45 states?


• How many of the mortgages were fraudulent from the very beginning: low docs, no docs, liar loans, NINJA's (all specialties of Countrywide)?


• How many homes are now vacant because the homeowners were illegally removed from them?


• How many of these homeowners were unemployed or otherwise financially distressed when the loans were originally made?