WHAT'S ON YOUR TITLE? (A textbook example of "toxic title!")

Get Ready, Get Set, Point Fingers

DURING the lending mania, as Wall Street’s mortgage machinery hummed
and the money poured in, millions of loans were bought and sold,
zipping across town or around the world. 

Now that this giant factory
is pretty much shuttered, details are emerging about how its assembly
lines actually operated. And as a dispute between two European banks
and Bank of America indicates, the revelations aren’t pretty.

Starting in late 2007, Deutsche Bank invested $1.2 billion in a mortgage financing vehicle known as Ocala Funding; alongside it was BNP Paribas, a French bank that put $481 million into the same vehicle.

Ocala issued short-term notes and from the proceeds, bought mortgages that it could promptly sell to Freddie Mac,
the government-sponsored enterprise. Bank of America was trustee,
collateral agent, custodian and depositary agent to Ocala — its back
office, in essence.

Ocala was busy: roughly $1 billion in
mortgages flowed in and out of it each month. Because of its structure,
Deutsche Bank and BNP viewed Ocala as a fairly low-risk investment. For
example, Ocala could not hold mortgages that it was waiting to sell to
Freddie Mac for more than 60 days, and it could buy only loans that had
been reviewed and were physically held by the original lender.

But
there were a couple of problems with the set-up: the company writing
the mortgages funneling through Ocala was Taylor Bean & Whitaker, a
lender that filed for bankruptcy last August. And to make its loans,
Taylor Bean used money from Colonial Bank, a Montgomery, Ala.,
institution that also went belly-up. The Federal Deposit Insurance Corporation took over Colonial in August.

Sorting
through the wreckage of those related failures has generated more
questions than answers so far. Taylor Bean was shut down by the Federal Housing Administration,
citing possible mortgage fraud. According to people briefed by those
winding down Taylor Bean’s operations, who requested anonymity in order
to preserve professional relationships, there are signs that the
company sold some of its loans to more than one buyer. Lawyers
representing Taylor Bean did not return phone calls seeking comment.

In
any event, Ocala says mortgages worth more than half a billion dollars
are missing. And the F.D.I.C. is withholding the release of mortgages
worth hundreds of billions held at Colonial that Ocala investors say
are theirs. The government contends that it is not clear that Bank of
America — as a representative for Ocala — paid for them.

Deutsche Bank wrote down its investment in Ocala by almost $500 million in the third quarter of this year.

BNP
and Deutsche Bank have sued Bank of America in federal court in
Manhattan. Both accuse Bank of America of breaching its custodial and
trustee duties to Ocala. The suits shed light not only on the
complexities of the mortgage machine but on how failsafe mechanisms in
these byzantine structures didn’t work.

People familiar with the mortgage machine’s innards say problems were industrywide.

“If
you look at the way these structures were built up, there were supposed
to be safeguards at every step to make sure all these things were done
properly,” said O. Max Gardner III, a lawyer in Shelby, N.C., who
represents financially troubled consumers. “When you see so many
problems across the country with the total inability to produce the
documents, then it really makes you wonder: did they really do this?”

According
to the court documents, Bank of America dropped a number of balls. It
improperly transferred $3.7 billion out of Ocala to accounts that had
no connection to the investment vehicle, Deutsche Bank said, and it
didn’t track the mortgages bought and sold on behalf of Ocala. Bank of
America also misstated the amount of mortgages held as security for
Ocala, the suit contends.

Last August, for example, after
Taylor Bean failed, Bank of America reported that Deutsche Bank’s
investment was secured by mortgages valued at over $1.16 billion. But,
Bank of America’s records showed at least $470 million of these
mortgages had already been delivered to Freddie Mac, the lawsuit said.
Ocala’s trustee “failed to maintain internal documentation necessary to
establish Ocala’s ownership of purchased mortgages,” Deutsche Bank
maintains.

Asked about the lawsuits, a Bank of America
spokesman provided a statement: “We share BNP and Deutsche Bank’s
concern about the handling of funds by Taylor, Bean & Whitaker and
Colonial Bank and have been actively pursuing recoveries in the
Colonial and TBW bankruptcies on behalf of these and other investors in
the Ocala facility.”

But Bank of America also said it was
misguided to hold it responsible for the problems: “We fulfilled our
contractual obligations in our limited administrative role with respect
to the Ocala facility, and will vigorously defend ourselves in court.”

Both
Deutsche Bank and BNP declined to comment beyond their suits. But both
contend that Bank of America’s role was more significant than a
secretarial function.

TO be sure, a full investigation of the
Taylor Bean and Colonial failures may show that Bank of America was
victimized by those institutions. In August, Bank of America sued
Colonial for breach of contract and civil theft, contending that it
failed to hand over more than $1 billion it had received from Freddie
Mac for Ocala loans purchased this year from June 11 to Aug. 4.

Given
losses as large as these, it’s no surprise that there is
finger-pointing all around. Unfortunately, it won’t be known for some
time, if ever, who is responsible for the Ocala losses.

But
this much is clear: The mortgage machine that created so many loans
amid the mania seems riddled with flaws. And until investors are
satisfied that those problems have been solved, the mortgage market is
likely to remain in its current depressed state.

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