The subpoenas could indicate that state Atty. Gen. Kamala Harris is widening her own investigation of big home lenders. (Kris Connor, Getty Images / February 10, 2011)
October 20, 2011
Copyright © 2011, Los Angeles Times
Investigators with the state attorney general's office have subpoenaed Bank of America Corp. in connection with the sale and marketing of troubled mortgage-backed securities to California investors, according to a person familiar with the probe.
The state is trying to determine whether the bank and its Countrywide Financial subsidiary sold investments backed by risky mortgages to institutional and private investors in California under false pretenses, according to the person, who was not authorized to speak publicly and requested confidentiality.
The subpoenas, which were served Tuesday, come as talks continue for a broad foreclosure settlement by a coalition of state attorneys general and federal agencies. California walked away from those discussions with major banks more than two weeks ago, saying what the banks were offering was not enough and the state would pursue its own investigations.
California has left the door open to signing on to a bigger settlement, and the BofA subpoenas were seen as a move to exert further pressure on the bank. The person familiar with the matter would not say how much the securities in question cost investors.
"I think the California AG is seeking leverage here," Nancy Bush, an independent bank analyst and contributing editor to research firm SNL Financial, said. "They have backed out of whatever 50-state AG settlement that is coming down the road, and they want more from that settlement, so, you know, why not bring a little extra pressure to bear?"
State and federal officials are also trying to entice California back into talks, this week floating an idea for helping creditworthy homeowners refinance loans that are underwater, or higher than the values of the homes. But the subpoenas could also indicate that Atty. Gen. Kamala Harris is widening her own probe of big mortgage lenders.
Harris has created a mortgage fraud strike force with a mandate of looking into all aspects of mortgage fraud, including securitization.
Many of these investments plunged in value as the housing market collapsed. Under California's False Claims Act, which makes it a crime to defraud the state, damages of up to three times the amount of the claim can be awarded if the victim was an institutional investor, such as one of the state's pension funds.
Bank of America declined to comment.
The person familiar with the investigation would not name any of the alleged victims but said that the list would include institutional investors and could potentially include private individuals.
The subpoenas are the latest assault resulting from Bank of America's 2008 acquisition of Countrywide Financial Corp. as the Calabasas-based lender, then the nation's No.1 home lender, skidded toward bankruptcy.
Countrywide helped fuel the housing boom and bust by trying to out-compete all rivals in the high-risk niches of the business: subprime loans to people with bad or nonexistent credit histories, "liar" loans made without verifying income and assets, and mortgages that allowed borrowers to pay so little that their loan balances rose instead of falling.
The Calabasas-based goliath bundled up many of the riskiest loans to back private-label securities that proved toxic to banks and investors. It also lobbied heavily to relax the standards at government-sponsored mortgage finance companies Freddie Mac and Fannie Mae, which are now wards of the government and have cost taxpayers billions of dollars.
BofA has also been strapped with massive losses from legal settlements over Countrywide loans.
Within months of acquiring Countrywide, Bank of America agreed with then-California Atty. Gen Jerry Brown and his counterparts in other states to cut payments by as much as $8.6 billion on mortgages that the officials said had abused borrowers.
Other settlements included a 2010 promise to forgive up to $3 billion in principal for Countrywide borrowers in Massachusetts; an agreement last year to pay $600 million to former Countrywide shareholders to settle a securities fraud lawsuit; and billions of dollars in payments to Fannie Mae and Freddie Mac to settle demands for buybacks of flawed home loans.
Then last June, Bank of America disclosed an agreement to pay out $8.5 billion to 22 institutional investors to settle demands that it repurchase bonds backed by Countrywide mortgages, with an additional $5.5 billion set aside to beef up reserves for similar claims filed by other investors in mortgage bonds.
It wasn't clear whether those litigation reserves would include funds to cover any liability for demands by Harris.
The state is trying to determine whether the bank and its Countrywide Financial subsidiary sold investments backed by risky mortgages to institutional and private investors in California under false pretenses, according to the person, who was not authorized to speak publicly and requested confidentiality.
The subpoenas, which were served Tuesday, come as talks continue for a broad foreclosure settlement by a coalition of state attorneys general and federal agencies. California walked away from those discussions with major banks more than two weeks ago, saying what the banks were offering was not enough and the state would pursue its own investigations.
California has left the door open to signing on to a bigger settlement, and the BofA subpoenas were seen as a move to exert further pressure on the bank. The person familiar with the matter would not say how much the securities in question cost investors.
"I think the California AG is seeking leverage here," Nancy Bush, an independent bank analyst and contributing editor to research firm SNL Financial, said. "They have backed out of whatever 50-state AG settlement that is coming down the road, and they want more from that settlement, so, you know, why not bring a little extra pressure to bear?"
State and federal officials are also trying to entice California back into talks, this week floating an idea for helping creditworthy homeowners refinance loans that are underwater, or higher than the values of the homes. But the subpoenas could also indicate that Atty. Gen. Kamala Harris is widening her own probe of big mortgage lenders.
Harris has created a mortgage fraud strike force with a mandate of looking into all aspects of mortgage fraud, including securitization.
Many of these investments plunged in value as the housing market collapsed. Under California's False Claims Act, which makes it a crime to defraud the state, damages of up to three times the amount of the claim can be awarded if the victim was an institutional investor, such as one of the state's pension funds.
Bank of America declined to comment.
The person familiar with the investigation would not name any of the alleged victims but said that the list would include institutional investors and could potentially include private individuals.
The subpoenas are the latest assault resulting from Bank of America's 2008 acquisition of Countrywide Financial Corp. as the Calabasas-based lender, then the nation's No.1 home lender, skidded toward bankruptcy.
Countrywide helped fuel the housing boom and bust by trying to out-compete all rivals in the high-risk niches of the business: subprime loans to people with bad or nonexistent credit histories, "liar" loans made without verifying income and assets, and mortgages that allowed borrowers to pay so little that their loan balances rose instead of falling.
The Calabasas-based goliath bundled up many of the riskiest loans to back private-label securities that proved toxic to banks and investors. It also lobbied heavily to relax the standards at government-sponsored mortgage finance companies Freddie Mac and Fannie Mae, which are now wards of the government and have cost taxpayers billions of dollars.
BofA has also been strapped with massive losses from legal settlements over Countrywide loans.
Within months of acquiring Countrywide, Bank of America agreed with then-California Atty. Gen Jerry Brown and his counterparts in other states to cut payments by as much as $8.6 billion on mortgages that the officials said had abused borrowers.
Other settlements included a 2010 promise to forgive up to $3 billion in principal for Countrywide borrowers in Massachusetts; an agreement last year to pay $600 million to former Countrywide shareholders to settle a securities fraud lawsuit; and billions of dollars in payments to Fannie Mae and Freddie Mac to settle demands for buybacks of flawed home loans.
Then last June, Bank of America disclosed an agreement to pay out $8.5 billion to 22 institutional investors to settle demands that it repurchase bonds backed by Countrywide mortgages, with an additional $5.5 billion set aside to beef up reserves for similar claims filed by other investors in mortgage bonds.
It wasn't clear whether those litigation reserves would include funds to cover any liability for demands by Harris.
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