BofA drags bal­ance sheet con­fi­dence back­ward

The mort­gage at is­sue in the court rul­ing was orig­i­nated in 2006 by Coun­try­wide Fi­nan­cial, which Bank of Amer­ica bought in 2008.

The Pak Banker - - Editorial5 - Jonathan Weil

The more we learn about the mort­gage in­dus­try's doc­u­men­ta­tion sna­fus, the more trou­bling hints we get that the fi­nan­cial state­ments of some of our biggest banks may be less re­li­able than any­one imag­ined. Here's the lat­est: Thanks to a Nov. 16 court rul­ing in Cam­den, New Jersey, we now know that a Bank of Amer­ica Corp. em­ployee, Linda DeMar­tini, tes­ti­fied last year that the lender rou­tinely re­tained pos­ses­sion of mort­gage prom­is­sory notes and re­lated doc­u­ments, even af­ter loans were pack­aged into bonds that were sold to in­vestors. If we're to be­lieve what she said, it raises the prospect that some of those loans still should be on Bank of Amer­ica's bal­ance sheet to­day.

Con­tracts for such se­cu­ri­ti­za­tions usu­ally re­quire the doc­u­ments to be trans­ferred to the trustee for mort­gage bond­hold­ers, as Bloomberg News noted in a Nov. 30 ar­ti­cle on DeMar­tini's tes­ti­mony. If the pa­pers weren't de­liv­ered prop­erly, that tees up the ques­tion of whether any loan trans­fers were im­prop­erly treated as sales for ac­count­ing pur­poses, and whether the bank's as­sets and li­a­bil­i­ties may be un­der­stated.

DeMar­tini's state­ments also place Bank of Amer­ica's out­side au­di­tor, Price­wa­ter­house­Coop­ers LLP, in a tough spot. The firm has no choice now un­der U.S. au­dit­ing stan­dards but to find out defini­tively if what DeMar­tini said is cor­rect, and whether the an­swer would af­fect any of its prior au­dit con­clu­sions. PwC billed Bank of Amer­ica $128 mil­lion for its au­dit and other ser­vices last year. The mort­gage at is­sue in the court rul­ing was orig­i­nated in 2006 by Coun­try­wide Fi­nan­cial, which Bank of Amer­ica bought in 2008.

Bank of Amer­ica is dis­avow­ing DeMar­tini's tes­ti­mony, which isn't sur­pris­ing con­sid­er­ing the stakes. The bank's P.R. of­fice says DeMar­tini, a team leader in the lender's mort­gage-lit­i­ga­tion man­age­ment depart­ment, had no idea what she was talk­ing about and wasn't in the right job to know the cor­rect facts, even though the com­pany flew her in from Cal­i­for­nia to tes­tify as its wit­ness. The com­pany also says its lo­cal New Jersey attorneys botched the court case. "The tes­ti­mony is just wrong," said Lau­rence Platt, an at­tor­ney at K&L Gates LLP in Washington, whom the bank des­ig­nated to field ques­tions about the case. "Coun­try­wide's pol­icy and prac­tice has been and re­mains to fully com­ply with the pool­ing and ser­vic­ing agree­ments, in­clud­ing for­ward­ing any nec­es­sary doc­u­ments to the trustee." A Bank of Amer­ica spokesman, Jerry Dubrowski, de­clined to an­swer ques­tions about PwC, but said it was pre­ma­ture to spec­u­late on the need for any ac­count­ing re­views. A PwC spokesman, Steven Sil­ber, de­clined to com­ment. Coun­try­wide's fi­nan­cial fil­ings show the com­pany sold more than $1 tril­lion of loans from 2005 to 2007, pri­mar­ily in the form of se­cu­ri­ties.

The last thing in­vestors need now, of course, is a new rea­son to worry about a too-big-to-fail bank's ac­count­ing. The com­pany's reg­u­la­tors would have ev­ery in­cen­tive to keep any se­ri­ous prob­lems from com­ing to pub­lic light, for fear of desta­bi­liz­ing the fi­nan­cial mar­kets. PwC and the other ma­jor ac­count­ing firms haven't ex­actly cov­ered them­selves in glory, ei­ther, since the fi­nan­cial cri­sis be­gan in 2007.

What Bank of Amer­ica can't do is take back DeMar­tini's words. Dur­ing an Au­gust 2009 hear­ing, U.S. Bank­ruptcy Judge Ju­dith Wiz­mur asked DeMar­tini whether the mort­gage notes were "ever moved to fol­low the trans­fer of own­er­ship," ac­cord­ing to a tran­script re­leased last week. Wiz­mur was pre­sid­ing over a suit filed against Coun­try­wide in 2008 by a debtor, John T. Kemp, as part of his Chap­ter 13 bank­ruptcy pro­ceed­ings. DeMar­tini replied: "I can't say that they're never moved be­cause, I mean, with this many mil­lions of loans as we have I wouldn't pre­sume to say that, but it is not cus­tom­ary for them to move."

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