New sheriff in town

The NY Attorney General. Dave Dayen has more:

This is an ENORMOUS deal. Schneiderman is looking at the failure to properly convey notes and mortgages to the securitization trusts, which court records clearly show was practically the industry standard during the housing bubble. Abigail Field’s work looking at just a handful of mortgages in one district court showed a perfect record of failure. These trusts were strictly time limited under New York law, and there’s no way for the banks to really make this right. By the way, the mortgages Field looked at had Countrywide as the originator. Countrywide is now part of Bank of America.

If this plays out as it could, Schneiderman could declare these securities invalid under New York trust law. There would be a lawsuit in response, of course, but the exposure of Bank of America for this claim is massive, potentially bigger than their capital reserves. Pretty much every investor in a BofA MBS would demand their money back on the faulty security. Not to mention the inability to foreclose on borrowers because of the lack of proof of ownership of the loan. We’re talking about trillions of dollars in losses on millions of loans with no true owner. It’s a nightmare scenario for the banks.

Obviously Schneiderman is just at the beginning of his probe. But at the least, this scrutiny of the loan documents shows that he’s completely not ready to join a 50-state settlement where he gives up his investigation in exchange for some nominal, piddling sum of money. That does not match his recent history and his ongoing investigations.

UPDATE: Gretchen Morgenson reports that Schneiderman and Delaware AG Beau Biden (the VP’s son) are investigating securitization fail at Bank of New York Mellon and Deutsche Bank. These were two of the bigger trustees, who had the responsibility of properly packaging mortgage backed securities.