Mortgage scandal boosts investors' campaign to get banks to buy back securities
Tuesday, October 26, 2010; 9:39 PM
Since the financial crisis broke out two years ago, unhappy investors in mortgage securities have struggled to organize themselves and achieve a common goal - force big banks to buy back loans that went bad because of shoddy lending practices.
Now, widespread reports of the banks botching their loan paperwork have breathed new life into the efforts by investors, and they say they are organizing their most aggressive legal offensive yet against the biggest bank in the country, Bank of America.
Once run by a loose group of hedge funds, the investors' campaigns have bulged in size in recent weeks, turning them into a force that could recoup tens of billions of dollars from Bank of America and other large lenders and act as a major drain on their earnings.
Previously, this group struggled to force the banking industry to hand over data critical to their lawsuits. Now with the Federal Reserve Bank of New York, the regulator of mortgage giants Fannie Mae and Freddie Mac, and some of the world's largest funds on board, the investors may be able to compel banks to reveal more about their lending practices.
The newly energized investors present a troubling scenario for the big banks that packaged loans and sold them as securities. On top of fighting off lawsuits from homeowners seeking to challenge foreclosure proceedings, these companies could face months of bitter and costly litigation as angry investors finally unite.
On Wednesday, a team of attorneys leading the charge is holding a conference in New York about failures by banks to properly service loans and their practice of hiring "robo-signers" who signed off on thousands of foreclosure files each month without verifying their accuracy.
The prospect of more lawsuits has already spooked Wall Street. On Monday, Bank of America's stock hit a 52-week low.
"If you think about people who come back and say, I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cyclinder, we're not putting up with that," said chief executive Brian T. Moynihan in an earnings call last week. "We will diligently fight this."
Still, the foreclosure debacle represents a turning point for mortgage investors who have long accused banks of misrepresenting the mortgages they issued. For instance, some investors have accused banks of overstating how many loans were taken out by borrowers using their properties as primary residences, which made the mortgages seem less risky than they actually were.
The robo-signer issue is one more piece of evidence, say investors, that the banks have failed to keep their end of the bargain.
"I think the robo-signers are a battle in a long war," said Bill Frey, chief executive of Greenwich Financial, which filed a suit in 2008 against Countrywide, now owned by Bank of America.
So far, investors have faced two major hurdles in their battle against the banks.