The Legal Lie at the Heart of the $8.5 Billion Bank of America and Federal/State Mortgage Settlements « naked capitalism

THIS IS INCREDIBLE ARTICLE.. THANK YOU TO THE AUTHOR!!!!

the Bank of America settlement was removed to Federal court and has now been sent back to state court, and there will be discovery in the state court process, so approval is not imminent).

But second and more important, investors approved nothing. Bank of New York is trying to act well outside its authority as trustee for the 530 Countrywide trusts in the settlement. It’s tantamount to having a friend that you gave a medical power of attorney claim that it gave him the authority to sell your car and write checks on your account.

The terms of Countrywide PSAs vary, but all appear to restrict mods. The prohibitions varied by credit quality of the deal. Alt-A and early vintage (2004 and earlier) deals often barred mods completely; subprime and later vintage deals generally allowed for a higher limit on mods, with 5% the top amount across these deals. The idea was that some mods were expected in the dreckier mortgage pools. Nevertheless, all of them, as well as the few that had no caps, also required Bank of America to buy the modified loans back at par. That is something the battered Charlotte bank would be very keen to avoid doing.

Now remember, as we have discussed, that these Countrywide deals also typically elected New York law as governing law for the trust. New York trust law is both well settled and unforgiving. Trusts are permitted to act only as stipulated; any deviation is a “void act” and has no legal force. And a trustee can ONLY exercise the authority the trust has; as an agent, it cannot exceed the legal rights its principal has.

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