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Big bank plans $420 million lawsuit over soured Countrywide loans

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Mortgage Professional America | 27 May 2016, 11:05 AM Agree 0
A trustee of a mortgage-bond trust says Bank of America and others didn’t take proper action even though they knew that Countrywide mortgage mortgages were toxic
  • Bill | | 27 May 2016, 02:33 PM Agree 0
    This is fascinating. Which "Rating Agency" approved the securitization of this submission, gave it their approval to rating the different tranches for investment by institutional investors, and isn't named as a "co-conspirator"? Inquiring minds want to know?
  • David Kirkland | | 27 May 2016, 05:19 PM Agree 0
    A Rating Agency does not "approve" a securitization. It makes recommendations regarding the percentage of credit enhancement necessary to allegedly "rate" the "A" pieces. All done under Rule 144-A - "Private Placements."

    Each part (tranche) characterized by a unique set of features such as maturity, interest (coupon) rate, interest payment date, to suit the need (one could also use the term “greed”) of different investors. A single bond, such as collateralized mortgage obligation (CMO) may be issued with several tranches within it, each with its own priority of principal repayment and own CUSIP number. A typical CMO, for example, has four tranches: A (fast pay), B (medium pay), C (slow pay), and Z (no coupon but receives cash flow from the collateral remaining after the previous three tranches have been satisfied).

    As one tranche matures, or is extinguished for whatever reason the next consecutive tranche takes its place—bottom up. Important to the CDO, DMO, CMBS and RMBS structure is tranching. Each level below the AAA tranche is considered a “credit support” tranche—that is, each portion or tranche that is beneath another provides credit support for the tranche above. In terms of cash flow, the principal and interest payments are first applied to the AAA tranche, then to the next subordinate tranche and so on. In terms of losses, the most subordinate tranche is exposed to the first loss, the “First Loss” piece.

    A capital markets structure professional will “slice and dice” the offering until it has attained what is deemed as the most appropriate “rate” for the AAA piece and so on. These values are subject to a “Rating Agency” confirmation of the various tranches. The Rating Agency allegedly works “independently” to arrive at the various support levels. However, the issuer is paying the Rating Agency for the rating. The fly in the ointment is these ratings are done for sales under SEC Rule 144A—rating for sales to those “in the business.”

    These bonds cannot be sold to the general public (except under certain criteria). Therefore, the public listening to all the media hype about “bond ratings” of the RMBS and CMBS offerings are not what the public is led to believe.

    How did the subprime mortgages come to be? Conventional real estate sales (interestingly, refinances did not play a large role in the subprime market) were not providing a sufficiency of mortgages to be securitized—the Wall Street sewer rats NEEDED additional product; they were not making enough money, well, they wanted more and more.

    Do you really think it was Angelo Mozilo, Countrywide; New Century Mortgage, Brad Morice and Frederic J. Forster; and Mortgage IT and others that actually created the subprime debacle? No. It was the Wall Street sewer rats. Without the Wall Street sewer rats, Mozilo and crowd would have no one to sell the mortgages to. Duh.

    Wall Street sewer rats know that with a certain level of “credit support” they may underwrite mortgages such as the no-doc mortgage, the “liar mortgage” and any other type of mortgage regardless of each borrower’s qualification(s). Certainly lenders—local and national—mortgage bankers, banks, savings and mortgage associations, and credit companies originated subprime mortgages and pay-option arm mortgages. Some claim that many of these mortgage originators were operating “outside the realm or jurisdiction” of federal regulators. Simply not true, as every lender of any type is required to make certain disclosures and operate under RESPA, FCRA, Regulation Z, Regulation B and any other regulation as required, without respect to whether they are “Federally Regulated.”

    And with the wonderful history of FNMA and FHLMC, the statement that many lenders were operating “outside the realm or jurisdiction” of federal regulators is preposterous. FNMA and FHLMC are just as culpable in poor underwriting of various residential mortgages as any other investor except for the Wall Street sewer rats. Their motivation was strictly greed, greed, and greed, oh, and greed. “Lenders greed will always supersede lenders need.”
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