Fed wants its money back from bad B of A mortgage bonds

The Fed is leading a group of investors trying to force Bank of America to buy back $47 billion in bad mortgage bonds. Image: CC Shannon Clark/Flickr

The foreclosure crisis could be coming home to roost on the banks that caused the housing crisis. The Federal Reserve Bank of New York joined a group of the largest bond investors in the U.S. Wednesday to demand that Bank of America buy back bad mortgage loans packaged into securities. Other mortgage bond investors are expected to follow suit, along with lawsuits that could lead to big losses for big banks.

Fed improves odds for jilted investors

Investors who took a bath in the housing crisis want to recoup losses on mortgage bonds from the banks that sold them. Bloomberg reports that the fight over who will ultimately take the hit got more interesting Wednesday when the Federal Reserve Bank of New York threw its weight behind a bid to force Bank of America to buy back $47 billion in bad mortgage debt packaged and sold by its subsidiary Countrywide Financial Corp. The Fed joined a group including Pacific Investment Management Co., BlackRock Inc. and Freddie Mac. An investment analyst told Bloomberg that the Fed’s involvement increases the odds that the group may prevail.

B of A seeks to evade responsibility

Bank of America said it refuses to be held responsible for the losses. Reuters reports that in a conference call with analysts, Bank of America Chief Executive Brian Moynihan said investors can’t justify the claim that his bank sold them bad mortgages. He compared it to people saying they bought a Chevy but they want a Mercedes in return. A representative for the group of investors told Reuters that it was a case of “buying a Vega and getting a Vega.”

Bank bailout 2.0

With the largest bond investors in the U.S. trying to force the largest mortgage lender in the U.S. to give them their money back, “expect a tidal wave to begin,” said Daniel Indiviglio at The Atlantic. Banks, even though they’re sitting on tens of billions of dollars in cash, will lose big if investors are successful. Banks may lobby Congress to pass a law that lets them off the hook. That just might happen because if the banks are forced to face the consequences of their actions, the financial industry could melt down once again.