Checking In On BofA’s Foreclosure Liability

bankofamerica 6 Checking In On BofAs Foreclosure LiabilityAt the beginning of October, Bank of America moved to suspend foreclosures in 23 states to check the legality of its foreclosure documents. A week later, it took that moratorium nationwide. Soon thereafter, the country’s largest bank by assets announced that it would resume foreclosures and said its foreclosure game was on point.

Those herky jerky events were followed by yet more herky-jerkiness, as the bank said it’s been reviewing its foreclosure files but hasn’t said specifically how many files it has reviewed, or what the problems appear to have been. This is not exactly encouraging, as Fortune‘s Colin Barr reports:

But even if Bank of America has been foreclosing only on late borrowers after appropriate loan-modification attempts, critics say, its statements have simply ignored the most important question.

“They may have been accurate in that the borrower was delinquent,” said Rebel Cole, a law professor at DePaul University in Chicago. “But what they don’t say is, ‘We have followed the law,’ and that is where the issue is.”

Meanwhile, amid growing concerns that the bank could be liable for investor putbacks of faulty mortgages, banking analyst Mike Mayo has issued a report suggesting that Bank of America’s Countrywide unit could file for bankruptcy. Bank of America bought Countrywide, a mortgage enormity and credit crisis casualty, in 2008. Kate Kelly of CNBC expressed skepticism:

So, would filing for Chapter 11 protection for the Countrywide unit be a way to ringfence those liabilities? Maybe, says Mayo (who in his note acknowledges the “slim legitimacy” of the bankruptcy notion). After all, Countrywide is still a separate legal entity, contains a disproportionate share of the problematic home loans, and a bankruptcy filing could prove cheaper than the putback costs.

But bankruptcy lawyers are highly dubious. A Countrywide Chapter 11 filing would be “devastating” to B of A’s reputation, says one, raising deep questions about its ability to live up to its obligations and the extent to which the market could maintain confidence in it. And Countrywide’s structure could make it difficult, or even impossible, to put the unit into bankruptcy.

Whether Mayo’s Countrywide predictions are viable or not, it’s pretty clear that a month into BofA’s foreclosure turmoil, Wall Street onlookers’ worries over the bank’s exposure to bogus mortgages haven’t abated.

mtaylor [at] observer.com | @mbrookstaylor