Foreclosure Defense: Ankle Biting from Lenders to Investment Bankers Benefits Borrowers

IT ALL COMES DOWN TO THIS: LENDERS DIDN’T CARE ABOUT THE QUALITY OF THE LOAN OR THE IMPACT ON BORROWERS OR INVESTORS (INCLUDING THEIR OWN SHAREHOLDERS). THEY WERE PREPARED TO FALSIFY ANYTHING AND USE ANY MISREPRESENTATION OR PRESSURE TACTIC THEY COULD TO GET THE LOAN SOLD AND THE BORROWER TO SIGN. THEY PRETENDED THEY HAD NO RISK BECAUSE THEY INTENDED TO DODGE THE RISK UNDER PLAUSIBLE DENIABILITY. BUT NOW ALL SIDES ARE CONVERGING ON THE LENDERS AND THE LOSSES WHICH MOUNTED IN THE INVESTMENT BANKS IS STARTING TO MOUNT IN THE BANKS THEMSELVES.

It might not seem like you should care about the woes of investors who were defrauded in much the same way as borrowers. Think Again. Our team has been assiduously researching the resources for borrowers and their attorneys to use. This site, we hope and we are told, is very helpful to attorneys and borrowers alike and lately bank executives and investors have been visiting. But remember, whether you are a borrower or an investor, you need a professional audit (See TILA AUDIT and Mortgage Audit under Foreclosure Defense links on right side of this page) done so you are not shooting blanks when you write your first demand letter or file your lawsuit. 

I have been contacted by a number of “auditing” companies that wish for us to recommend them. I would be more than happy to recommend more than the two we have here. (see links on right side of the page). But a review of the work by everyone else reveals serious deficiencies in their work and in their objectives. We also find that the fees charged by most of these start-ups or loss mitigators are too high — i.e., they are disproportionate to the relief or remedy they might achieve. In most cases all they offer, like bankruptcy attorneys is a very temporary deferral of the inevitable.

The total audit, report and recoemmnedation should consist of advising you on TILA, RESPA, RICO and the “little FTC” acts of each state. You should be seeking not merely relief on monthly payments, but refunds, damages and attorney fees if an attorney is used. You should be seeking to stop foreclosure, sale or eviction because proceedings up to this point have been procured by fraud, with the trustee or the lender misrepresenting the real parties in interest. (In legal parlance failure to include necessary and indispensable parties and lack of standing).

In most cases, the real parties in interest are multiple owners of perhaps multiple securitized instruments backed by your mortgage. And in most cases the lenders have no way of tracing the actual owners of the mortgage and note to the specific property which is encumbered by your mortgage. It is a realistic goal, even if improbable, to seek removal of the mortgage lien, release from liability on the note and to walk away with the house free and clear. 

Read carefully. These are lawsuits from investors who, as part of the deal when they bought the CDO, CMO, CLO etc., were entitled to sell the security back at full price to the lender if there was fraud, misrepresentation etc. The fraud and misrepresentation they are alleging is basically the same as the fraud and misrepresentation you, the borrower, were subjected to. Deceit and cheating were the name fo the game. Even Moody’s announced in today’s Wall Street Journal that they are cleaning house where ratings were improperly stated through “neogitation” rather than analysis. This is good stuff and you ought to get to know about it.

These are also the lawsuits of shareholders of lenders who allege that the lenders failed to disclose to the public and shareholders in particular what they were doing, what exposure they had to liabilities arising from almost certain buy-back of most of the loans they sold, many of which are averaging default rates of 30% or more.

This is all inside stuff that tells your story only from the point of view of the investor. By showing that the lenders were defrauding everyone up an down the line, you can demonstrate to a court that there was a pattern of corruption and fraud. The lenders know it and so do the investment bankers without whose help the scheme would not have worked. Settlements are the most likely way out for all concernerd. 

These lawsuits consist of allegations by INSIDERS who know the truth. The allegations verify what we have been saying in this blog for many months — that the scheme depended upon a consistent pattern of fraud, misrepresentation and plausible deniability from one end (the investor who provided the money under false pretenses, false ratings and false assurances of insurance) to the other end (the borrower who signed the mortgage documents under false pretenses, false appraisals, undisclosed lender practices, rebates to mortgage borkers, high fees — bribes — to appraisers, and title agents who turned ablind eye toward the obvious inequities of the closing).

IT ALL COMES DOWN TO THIS: LENDERS DIDN’T CARE ABOUT THE QUALITY OF THE LOAN OR THE IMPACT ON BORROWERS OR INVESTORS (INCLUDING THEIR OWN SHAREHOLDERS). THEY WERE PREPARED TO FALSIFY ANYTHING AND USE ANY MISREPRESENTATION OR PRESSURE TACTIC THEY COULD TO GET THE LOAN SOLD AND THE BORROWER TO SIGN. THEY PRETENDED THEY HAD NO RISK BECAUSE THEY INTENDED TO DODGE THE RISK UNDER PLAUSIBLE DENIABILITY. BUT NOW ALL SIDES ARE CONVERGING ON THE LENDERS AND THE LOSSES WHICH MOUNTED IN THE INVESTMENT BANKS IS STARTING TO MOUNT IN THE BANKS THEMSELVES.

Investors Press Lenders on Bad Loans

Buyers Seek to Force Repurchase by Banks; 
Potential Liability Could Reach Billions
By RUTH SIMON
May 28, 2008; Page C1

Already burned by bad mortgages on their books, lenders now are feeling rising heat from loans they sold to investors.

Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans. The pressure is the result of provisions in many loan sales that require lenders to take back loans that default unusually fast or contained mistakes or fraud.

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The potential liability from the growing number of disputed loans could reach billions of dollars, says Paul J. Miller Jr., an analyst with Friedman, Billings, Ramsey & Co. Some major lenders are setting aside large reserves to cover potential repurchases.

Countrywide Financial Corp., the largest mortgage lender in the U.S., said in a securities filing this month that its estimated liability for such claims climbed to $935 million as of March 31 from $365 million a year earlier. Countrywide also took a first-quarter charge of $133 million for claims that already have been paid.

The fight over mortgages that lenders thought they had largely offloaded is another reminder of the deterioration of lending standards that helped contribute to the worst housing bust in decades.

Such disputes began to emerge publicly in 2006 as large numbers of subprime mortgages began going bad shortly after origination. In recent months, these skirmishes have expanded to include home-equity loans and mortgages made to borrowers with relatively good credit, as well as subprime loans that went bad after borrowers made several payments.

Many recent loan disputes involve allegations of bogus appraisals, inflated borrower incomes and other misrepresentations made at the time the loans were originated. Some of the disputes are spilling into the courtroom, and the potential liability is likely to hang over lenders for years.

Repurchase demands are coming from a wide variety of loan buyers. In a recent conference call with analysts, Fannie Mae said it is reviewing every loan that defaults — and seeking to force lenders to buy back loans that failed to meet promised quality standards. Freddie Mac also has seen an increase in such claims, a spokeswoman says, adding that most are resolved easily.

Many of the repurchase requests involve errors in judgment or underwriting rather than outright fraud, says Morgan Snyder, a consultant in Fairfax, Va., who works with lenders.

Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIAInc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January, Armonk, N.Y.-based MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. “There are a significant number of loans that should not have been in these pools to begin with,” says Mitch Sonkin, MBIA’s head of insured portfolio management.

Ambac is analyzing 17 home-equity-loan deals to see whether it has grounds to demand that banks repurchase loans in those pools, according to an Ambac spokeswoman.

Redwood Trust Inc., a mortgage real-estate investment trust in Mill Valley, Calif., said in a recent securities filing that it plans to pursue mortgage originators and others “to the extent it is appropriate to do so” in an effort to reduce credit losses.

Repurchase claims often are resolved by negotiation or through arbitration, but a growing number of disputes are ending up in court. Since the start of 2007, roughly 20 such lawsuits involving repurchase requests of $4 million or more have been filed in federal courts, according to Navigant Consulting, a management and litigation consulting firm. The figures don’t include claims filed in state courts and smaller disputes involving a single loan or a handful of mortgages.

In a lawsuit filed in December in Superior Court in Los Angeles, units of PMI Group Inc. alleged that WMC Mortgage Corp. breached the “representations and warranties” it made for a pool of subprime loans that were insured by PMI in 2007. Within eight months, the delinquency rate for the pool of loans had climbed to 30%, according to the suit. The suit also alleges that detailed scrutiny of 120 loans that PMI asked WMC to repurchase found evidence of “fraud, errors [and] misrepresentations.”

PMI wants WMC, which was General Electric Co.’s subprime-mortgage unit, to buy back the loans or pay damages. Both companies declined to comment on the pending suit.

Lenders may feel pressure to boost reserves for such claims because of the fear they could be sued for not properly accounting for potential repurchases, says Laurence Platt, an attorney in Washington. At least three lawsuits have been filed by investors who allege that New Century Financial Corp. and other mortgage lenders understated their repurchase reserves, according to Navigant.

–James R. Hagerty contributed to this article.

Write to Ruth Simon at ruth.simon@wsj.com

3 Responses

  1. I am a California licensed attorney who does TILA audits and rescission services for borrowers, at an affordable flat fee: $500 for reviews of up to two sets of loan docs. If the borrower has rescission rights, and it makes sense for the client to exercise them (because sometimes it really doesn’t), then I put together the rescission package(s) for another flat $500 fee. As noted throughout your blog, the lender eats the attorney fees upon a valid rescission, so my services end up being free to the borrower in the majority of cases. In the interest of full disclosure, I do not handle litigation or bankruptcy. On those rare occasions when a lender refuses to accept a valid rescission sent by my firm, I work with my clients to find litigation and/or bankruptcy counsel.

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  3. great content, I really like this website. Also i used this short sale course to help me learn how to close foreclosure and pre-foreclosure deals. http://www.FreeShortSaleCourse.com

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