To the long list of those picking fights with banks over bad mortgages, add the Federal Reserve.
Two years after the Fed bought billions of dollars in mortgage securities as part of the financial bailout, its New York arm is questioning the paperwork — and pressing banks to buy some of the investments back.
The Federal Reserve Bank of New York and several giant investment companies, including Pimco and BlackRock, have singled out Bank of America, which assembled more than $2 trillion of mortgage securities from 2004 to 2008.
Bank of America is already dealing with the fallout from the fight over whether foreclosures were handled properly. It insists that no foreclosures have been initiated in error, and on Monday announced it would resume the foreclosure process in 23 states where court approval is required to go ahead.
But while the human toll of the foreclosure crisis has grabbed the headlines, the fight over how these loans were created in the first place could last longer and ultimately cost the banks much, much more. And it is setting the stage for a huge battle between mortgage holders like the government, hedge funds and other institutional investors on one side and the big banks on the other.
“It’s very serious,” said Glenn Schorr, an analyst with Nomura Securities. “The numbers are all over the map.”
If the Fed and the investors succeed, it could cost Bank of America billions of dollars. On Wall Street and in bank boardrooms, the question of whether investors can force banks to buy back, or “put-back,” the bad mortgages to the banks that sold them is dominating the debate and worrying analysts, money managers and banking executives