Dine and Dash Underwriting
Research for Online Investors

by John Dalt

10/21/10

The home loan mortgage furor seems to be dying down, or is it?  New York’s Chief Judge, Jonathan Lippman, instituted a new rule, effective immediately.  Attorneys must sign an affirmation that they have reviewed and taken reasonable steps to verify that foreclosure documents are accurate.

The Wall Street Journal reports that Bank of America (BAC) said they have reviewed 102 thousand cases and is ready to submit them in 23 states.  They are reviewing foreclosure actions for the other 27 states.  The Chief Judge said “We can’t have the process being a fraud.  It has to be real and based on credible information.”

J.P. Morgan (JPM) has suspended foreclosures in 41 states.  A spokesman said its average foreclosure in New York State takes 792 days.  Over two years?  New York courts handle around 80 thousand foreclosures a year according to the judge.  But, he doesn’t believe the additional requirement will slow down the process.

While the banks are working the foreclosure problem, there is another game afoot in the mortgage mess. Bloomberg reports that mortgage bond investors are demanding refunds on some of the flawed mortgages.  Bank of America (BAC) reported this week their claims have jumped to $12.9 billion, up 71% from a year ago.

Pacific Capital Management, Fannie Mae and Freddie Mac contend that sellers of mortgages should buy them back if there were misrepresentations of borrower income or inflated appraisals.

Bank of America has the largest liability.  They have already resolved claims of $14 billion and have $4.4 billion in reserves for another $12.9 billion in problem loans.  BAC bought Countrywide, the U.S. largest mortgage lender in 2008.

Branch Hill Capital, a Hedge Fund, believes that BAC may have potential liabilities of $74 billion.  The Fund is short BAC.  J.P. Morgan (JPM) increased their reserves in the last quarter to about $3 billion, and Citigroup raised their reserves to $952 million.

Well Fargo (WFC) reduced their reserves to $1.3 billion.  WFC’s Chief Financial Officer Howard Atkins said “These issues have been somewhat overstated and to a certain extent, misrepresented in the marketplace.  Our experience continues to be different than some of our peers in that our unresolved repurchase demands outstanding are actually down.”

A lawsuit filed in New York against BAC over Countrywide loans, asserts that 97% of 6,533 loans in 12 different securitizations failed compliance with underwriting guidelines. Richard Bowen was the chief underwriter at Citigroup (C). He testified before the Financial Crisis Inquiry Commission (FCIC) last spring. He said that 60% of the loans purchased by Citi in 2006 were defective, and that it got worse in 2007 and 2008 to over 80% of production.

Bond holders may also push for repurchase on foreclosure property loans if the files are incomplete or out of compliance.  About 26% of mortgages without government backing are at least 60 days late, in foreclosure, or backed by bank seized homes.

In a strange twist, the Federal Reserve Bank of New York has joined in a suit against BAC over a $47 billion package of loans.  On one hand the Fed is pumping money into the banks, and the other is suing to recover it!  Roger Eisenbeis, former Fed research director calls it an inherent conflict.

Many of the mortgage mills that produced the mess are out of business.  Kurt Eggert, a law professor at Chapman University said, “It’s troubling that the people who caused the problem have walked away and left everybody else to fight over who gets stuck with the tab.  It’s like a massive game of dine and dash.”

We are tempted by BAC and JPM; a meaningful bottom may come soon.  Is all the bad news priced in yet?  We don’t know.  Wait for the volume to dry up a little, and then we may have a trade in financials.

To the mailbag:
I sold APWR today and took out the profit at $7.362  Great recommendation.  How do I get on the Buy, Sell, Hold Service?

John’s reply:  Glad you made money on it, we are going to continue to hold.  Just click on the Buy, Sell, Hold offer/explanation on our web-site home page.  It is in the left column, with our other premium services.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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