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What Bank of America Actually Did Wrong

AUG 28, 2014 3:42pm ET
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Bank of America in its record-setting regulatory settlement of misrepresentations related to securitized loans acknowledges it and its predecessors bent underwriting rules to the point where there virtually weren't any.

A 30-page statement of facts from the U.S. Department of Justice released as part of the settlement shows how Countrywide and Merrill Lynch, both of which B of A acquired as well as B of A itself removed an increasing number of underwriting requirements over time without clear disclosure to investors.

Countrywide, for example, had a policy where branch underwriters could refer loan applications that failed to meet guidelines to a "Structured Loan Desk" that would consider exceptions.

The desk would approve exception requests based on a second set of what it called "shadow guidelines" that allowed underwriters to approve loans with loan-to-value and credit criteria below normal standards.

If an application failed to meet the shadow guidelines, the Structured Loan Desk underwriters could return it to branch underwriters with a "counter offer," essentially suggestions for how the application could be originated using a different loan product or asking the borrower to increase the size of a down payment. The branch underwriter could then decide whether to approve the loan.

In other cases when an application before the Structured Loan Desk didn't meet the shadow guidelines, underwriters could submit it to Countrywide's "Secondary Market Structured Loan Desk." This desk would determine whether the secondary market would buy the loan. If the Secondary Market Structured Loan Desk determined the loan saleable, it would price it and return the application to the branch underwriter for a decision.

Countrywide also asked third parties reviewing samples of loans to consider these underwriting exceptions. Countrywide gave due diligence providers "Seller Loan Program Guides" that reflected the credit attributes of loans the company previous sold into the secondary market. These often allowed higher debt-to-income and LTV ratios than either the branch underwriters or the Structured Loan Desk.

An unnamed executive in a July 28, 2005 e-mail directs the Structured Loan Desk to "the widest extent possible" immediately start allowing exceptions on all mortgages as long as they have a balance less than $3 million.

By 2006, Countrywide had an Extreme Alt-A program, which expanded Structured Loan Desk underwriting parameters in areas like credit and LTV. This program not only encouraged underwriting exceptions, but also removed the need to offset any new risks created by the exceptions.

"The Extreme Alt-A guidelines did not require SLD underwriters to identify compensating factors in connection with underwriting the loans," according to the Statement of Facts.

An April 5, 2006 e-mail from another unnamed executive at Countrywide suggests the company knew the loans were very risky and that the company planned to address that risk by selling them off. The e-mail indicates a second unnamed Countrywide executive had referred to Extreme Alt-A as a "hazardous product." That second executive apparently had wanted "to see a detailed implementation plan which addresses the process for originating the selling these loans such that we are not left with credit risk."

Merrill Lynch didn't seem to be at all concerned that it might be selling loans with a considerable degree of credit risk to the secondary market.

Due diligence providers conducting compliance and credit reviews found as much as 50% of loan samples were not compliant with laws and regulations or applicable underwriting guidelines, lacked the sufficient offsetting compensating factors, or had a loan file missing a key piece of documentation.

Due diligence providers and sometimes whole loan traders re-evaluated some of these loans and "'waived" particular loans into a purchased pool.

A consultant and Merrill's due diligence department asks in an email excerpted in the statement of fact "[h]ow much time do you want me to spend looking at these [loans] if [the co-head of Merrill Lynch's residential mortgage-backed securities business] is going to keep them regardless of issues?"

In representing the quality of the securitized loans to investors, Merrill indicated that originators generally made the securitized loans within guidelines unless there were "compensating factors" that justified exceptions.

These Merrill Lynch and Countrywide underwriting exceptions occurred within the private market, but B of A itself which acquired Countrywide in 2008 and Merrill in 2009 made some questionable loans under the auspices of a government program after those acquisitions.

"Review of Bank of America's early default loans indicates that for many loans, Bank of America did not always meet FHA requirements," according to the Statement of Facts. These were Federal Housing Administration-insured loans that B of A originated on or after May 1, 2009. "Reviews of samples of FHA loans originated by Bank of America showed unacceptable rates of material underwriting defects," the statement said.

A notorious example in the Statement of Facts is a $156,491 loan backed by a 24-year old mobile home that contained "numerous unresolved income discrepancies."

"The borrower also was delinquent on his initial loan at the time of closing. In addition the borrower was improperly permitted to roll $12,623 of credit card and auto debt into the new loan. The borrower only made two payments before defaulting on the new FHA loan."

In another FHA loan, the bank "failed to verify the borrower's employment and omitted the borrower's debts from the credit analysis."

Bank of America inherited Countrywide's suite of custom technologies that had been built during its heyday, including a servicing system of record still in use today, and an automated underwriting system called Countrywide Loan Underwriting Expert System, or CLUES. According to the Statement of Facts, when B of A began using the AUS, it "sometimes changed an applicant's financial information and then resubmitted the loans multiple times in an effort to get a CLUES 'accept.'"

Comments (9)
I am a mortgage loan originator now, and was a mortgage loan originator then. I have been with the same brokerage firm for almost 11 years at this point. I want to state that at no time did I understand that BofA or Countrywide got any respect or any loan referrals from my employer or from any of my contemporaries at other brokerage firms. There are a great many mortgage professionals today who have been tarred with the brush that Dodd Frank was intended to clean. Unfortunately, stories like this one never give any ink to those of us who do good work and know good loans when we see them.
Posted by Don S | Friday, August 29 2014 at 10:06AM ET
It's things like this that played a huge part in our financial & real estate meltdown of 2008. Knowingly & intentionally making loans of this nature is pure fraud and they deserve to be prosecuted to the full extent of the law.
I've been in the mortgage banking industry since 1979 and it was obvious to me that from 2003 to the end of 2005 that things were getting out of control....appreciation was climbing way too fast and it was true that virtually anyone could get a mortgage. Home prices were climbing so fast and subprime loans were allowing buyers to obtain 80/20 interest only loans when those buyers should never have been approved period. It became apparent that the secondary market's motto was "if you can fog a mirror you can get a mortgage"....seriously. They didn't care who they gave a loan to because they felt if the borrower defaulted they could simply sell the home because the values were climbing so fast. It was like the perfect storm and as soon as the supply of homes exceeded demand it all came crashing down....
Let's hope that all the new underwriting guidelines have corrected the ability of lenders to make bad loans...of course you can't avoid some borrowers from defaulting but 2
Posted by stephen s | Friday, August 29 2014 at 12:24PM ET
The headline of this article is very misleading. Instead of "What Bank of America Did Wrong", you should have titled it "What the Companies that Treasury Forced Bank of America to Buy at Gunpoint in a Smoky Room with Hank Paulson, Jamie Dimon, Vikram Pandit and Tim Geithner Did Wrong."

Seriously, I get that BofA is the redheaded stepchild of the mortgage business today and that DOJ loves to target them in their fleecing schemes. I'm not their biggest fan either, but let's not conflate wrongdoing committed by CWBC and Merrill BEFORE BofA BOUGHT THEM with BofA wrongdoing.

Your points about BofA FHA loans at the end of the article are certainly valid criticisms of the Bank, and they are inexcusable. That being said, if you want to focus on that problem, how about writing a story on how virtually every lender in the wholesale and correspondent channels tried to turn FHA into "the next subprime" in 2008 and 2009. The problems you outline at BofA are egregious certainly, but they are not even close to the most egregious examples of faulty FHA origination practices in the time period.

In your desire to keep up with the joneses of the mortgage trade rags by dumping on Bank of America, you've committed journalistic malpractice with this article.
Posted by MortgageInstructor | Friday, August 29 2014 at 12:44PM ET
So based on this: (The e-mail indicates a second unnamed Countrywide executive had referred to Extreme Alt-A as a "hazardous product." That second executive apparently had wanted "to see a detailed implementation plan which addresses the process for originating the selling these loans such that we are not left with credit risk.")

My question is... Why is this executive "unnamed" and further, why is he not in PRISON? This is clear evidence of a conspiracy to defraud investors. He essentially knew the loans were crap, and planned to "stick it" to someone else by selling them off ASAP. That's criminal intent to defraud. His name should be plastered accross the front page of the WSJ (along with a photo of him in a bright orange jumpsuit doing the "perp walk")
Posted by jtetreault | Friday, August 29 2014 at 12:48PM ET
has the government check world lending group that originated a great deal of these loans for countrywide thru their MLM SEMINARS? The homeowners that lost their homes thru the fraudulent practices of the banks what is the government going to do about that? why is the homeowners taxpaying citizens have to be victims of this crime that the government is aware of? WHAT IS THE GOVERNMENT GOING TO DO ABOUT THAT???
Posted by Thelma T | Friday, August 29 2014 at 12:49PM ET
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