According to DiMartini, it was customary for Countrywide to maintain possession of the original note and the related documents even after the loans were packaged up into bonds and sold off to investors. If this is true, there are a lot of legal problems with this.
Bank of America is denying that DiMartini got her facts right in the New Jersey foreclosure case Bloomberg's Jonathan Weil talks about in the link above. But what if she is right? That would mean that a lot of the collateral behind the mortgage backed securities that powered the mortgage industry and provided liquidity in the days before the crash may simply not exist in a legal sense. I don't think people really understand how big this problem is going to become.
Now I certainly hope this isn't true and that DiMartini has her facts wrong. No one wants to see the country's largest financial institution in trouble. That will not help the economy recover. But if it is true, we must not underestimate the seriousness of this problem.
Ignoring for a moment all of the legal issues raised by Weil and others who have commented on this story, this could have a serious impact on all of us. If the mortgage-backed securities BofA sold investors are, in fact, backed by nothing, BofA could be forced to buy back millions of dollars worth of securities. This will lead to another bailout.
Taxpayers will be on the hook for millions more as the government simply prints out more cash and devalues our currency around the world. The idea that BofA can simply engage in trench warfare and handle this on a case-by-case basis, as some of its executives have suggested, is short-sighted. A pattern of behavior could lead to a class action. Crimes across state lines could lead to charges for more serious financial crimes.
The bad behavior that got us into this mess is not just going to go away. The skeletons in the closet are going to come out and they're going to march and assemble and it's going to be ugly.
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