Mortgage Insurer Asks Court to Bless Claim Denials

Lawsuits like this one have been on the rise as ever more mortgages default. It is no secret that the housing market boom fostered poorly underwritten mortgages, in which it was common that a borrower’s income was inflated or never documented. Insurers are denying the claims on many loans, asserting they are not liable to pay claims because, they allege, the loans were originated fraudulently.

It would be funny if it wasn’t so damned serious. The ankle-biters are proving the borrower’s case that the loans were fraudulently procured. And they are making the case for borrower’s rescission under TILA. The “rescission” remedy that insurance companies are so fond of is now being used by Big Insurance against Big Banks.

You might remember during the health care debate this came out when the heads of each major health insurer were asked by a congressional panel if they would pledge to give up rescission, they said no. That’s because rescission is their ace in the hole.

If they don’t like the claim they rescind the policy and give you back your premiums. That’s it. Meanwhile you checked into the hospital expecting an operation that costs say, half a million dollars, and now you find out you are either going to die or you have to come up with the half million bucks yourself.

That’s the situation here. The Insurance company comes up with some erroneous statement of fact on which they can hang their rescission hat. Like in health care where they suddenly find that you didn’t disclose a pre-existing condition that you didn’t know you had. Here they are saying that they won’t pay off on the mortgage loans because the loans were bad to begin with and that they were deceived by the failure to disclose the absence of underwriting standards being applied.

Let’s see. You have insurance companies issuing policies for more than they could ever pay and the insured party is the one who committed fraud? AIG, Republic and the rest of them were as complicit in this financial tragedy as anyone else. Believe me, if a guy like me sitting in retirement in Arizona was able to figure it out then any of these financial knuckleheads could have done the same and most assuredly looked the other way when the figures didn’t add up — except for the figures used to compute their bonuses.

Mortgage Insurer Asks Court to Bless Claim Denials

Insurance Networking News, February 16, 2010

Sara Lepro

The game of hot potato between lenders and mortgage insurers continues.

The mortgage insurance unit of Old Republic International Corp. is asking a court to back its refusal to pay claims on soured mortgages originated by Countrywide Financial Corp.

In a suit filed Dec. 31 in New York State Supreme Court, Republic Mortgage Insurance Co. said it has discovered more than 1,500 delinquent Countrywide loans with “material misrepresentations … , in some cases by Countrywide or with its knowing participation.”

Republic said that, because Countrywide, now a unit of Bank of America Corp., disputes the insurer’s investigation and its refusal to pay the claims, it is seeking a declaratory judgment that its procedures were consistent with the law and are not a basis for the lender to challenge the rescissions, or policy cancellations.

Old Republic disclosed the suit in a Securities and Exchange Commission filing Feb. 5.

Lawsuits like this one have been on the rise as ever more mortgages default. It is no secret that the housing market boom fostered poorly underwritten mortgages, in which it was common that a borrower’s income was inflated or never documented. Insurers are denying the claims on many loans, asserting they are not liable to pay claims because, they allege, the loans were originated fraudulently.

Moody’s Investors Service Inc. has estimated that in recent quarters private mortgage insurers have rejected about 25% of claims, up from a historical average of about 7%.

In another recent case, Bank of America sued MGIC Investment Corp. over its rescission practices. B of A has also stopped sending new business to the Milwaukee insurer.

What is different about the Republic case is that the insurer is being proactive in seeking validation of its rescission practices.

“Some courts are better than others for insurers, and they wanted to make sure Countrywide didn’t jump them,” said David Goodwin, a partner in the policyholder insurance practice at Covington & Burling LLP in San Francisco. Goodwin is not involved in the Republic case.

Neither Republic nor B of A would discuss the suit. (The lender is trying to get the case moved to arbitration.)

However, Al Zucaro, the chairman and chief executive officer of Old Republic, the Chicago parent of Republic Mortgage Insurance, said that, with the increasing volume of rescissions, it is natural for the number of disagreements between lenders and insurers to rise.

“There’ve always been rescissions in the business,” he said. “They’ve just not in the past been at the same high level as they seem to be currently.”
Fannie Mae and Freddie Mac, which buy most of the loans covered by private mortgage insurers, compound the problem by forcing lenders to buy back a lot of these loans, he said.

“Fannie Mae and Freddie Mac themselves have been rescinding a lot of loans as well,” he said. “So whenever that happens, it creates obvious pressures and stresses in the system.”

8 Responses

  1. Hey Kim, are you THAT kim thomas?

  2. In the case of RBC MORTGAGE:

    According to the DOJ: RBC Mortgage Company Pays U.S. More Than $10.71 Million to Settle Allegations Involving Federally Insured Mortgages

    WASHINGTON – RBC Mortgage Company (RBC) has agreed to pay the United States more than $10.71 million to resolve allegations arising under the False Claims Act concerning 219 federally insured loans for mortgages submitted to the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD), the Justice Department announced today. The government alleged that, between 2001 and 2005, RBC, a subsidiary of the Royal Bank of Canada, falsified documentation in support of loan applications, violated due diligence underwriting requirements and improperly submitted loans for endorsement by HUD that were not eligible for FHA insurance.

    RBC, a publicly traded Canadian corporation, maintained offices located throughout the United States including Rockford, Ill. RBC was a pre-approved lender with “Direct Endorsement Authority” to originate and process FHA loans without waiting for prior review of the application by HUD. The FHA program and the direct endorsement process are designed to help low and moderate income families purchase homes by lowering some of the costs associated with mortgage loans.

    As a pre-approved lender, RBC was responsible for conducting due diligence in underwriting the loans by verifying each borrower’s qualifications. The mortgage firm also was obligated to meet other requirements established by regulations or HUD program guidance. RBC has not originated a mortgage loan since September 2005.

    The settlement reached between RBC and the United States resolves these allegations. In addition to its agreement to pay more than $10.71 million, RBC has also agreed to pay $264,000 to resolve administrative claims with respect to 39 federally insured loans.

    This settlement was reached through the collaborative efforts of the U.S. Attorney’s office for Northern District of Illinois, the Department of Housing and Urban Development’s Office of Inspector General and the Justice Department’s Civil Division.” -http://www.justice.gov/opa/pr/2008/November/08-civ-1051.html

    Folks, by now it should be plain to see that the Government is aware that of exactly what’s been posted:

    “Lawsuits like this one have been on the rise as ever more mortgages default. It is no secret that the housing market boom fostered poorly underwritten mortgages, in which it was common that a borrower’s income was inflated or never documented. Insurers are denying the claims on many loans, asserting they are not liable to pay claims because, they allege, the loans were originated fraudulently.”

    Why?

    Because The Government has already filed and won them.

    If you’re a Pro se Litigant, the question is what are you gonna do?

  3. From Mondaq today:

    United States: Title Insurance Companies Eliminate Creditors’ Rights Coverage For Real Estate Buyers And Lenders
    Related Information
    17 February 2010
    Article by Darrin S. Forbes and Douglas J. Lubelchek

    Recently, various national title insurance companies, such as First American Title Insurance Company and the entire Fidelity National Title Group—which includes Chicago Title Insurance Company, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title and Alamo Title—officially announced that, effective immediately, creditors’ rights coverage will no longer be available by endorsement, affirmative coverage, issuance of the American Land Title Association (ALTA) 1970 policies or otherwise. This change affects both owner’s and loan policies.
    Creditors’ rights coverage previously provided the purchaser of real property or its lender with insurance that the transaction at issue would not be unwound or set aside by a creditor of the seller or borrower, as applicable, on the basis of the transaction constituting a voidable preference or fraudulent conveyance under federal bankruptcy, state insolvency or similar creditors’ rights laws. This coverage also included attorneys’ fees and defense costs resulting from such claims. The costs in these cases can be substantial.
    The elimination of title insurance, and the resulting significant costs from a claim by a creditor, underscores that buyers and lenders may want to conduct a greater level of due diligence regarding the parties to the transaction and the terms of each transaction to identify whether any of the elements of a potential claim by a creditor exists. In general, a successful creditors’ claim requires proof that the transaction was either: (i) made with the intent to hinder, delay or defraud a creditor or (ii) for less than “reasonably equivalent value” when the transferor was insolvent at the time of the transfer or became insolvent as a result of it. If a successful preference or fraudulent transfer claim is asserted by a creditor, a court may set aside the subject transaction. The analysis would be fact-specific and may turn on the circumstances of a particular transaction. However, for any transaction, a buyer or lender may want to examine all available data and information to identify if any of the foregoing factors are present.
    As part of such examination, buyers or lenders should thoroughly investigate the financial condition of the seller or borrower, as applicable, at the time of entering into the particular transaction and analyze the likely impact of the transaction on such party and its creditors going forward. They may also want to obtain and review detailed financial statements, credit ratings and similar reports, if available. When dealing with a public company, buyers or lenders may also want to review the company’s public filings and stock prices, as the company’s recent stock prices can indicate the market’s perception of its financial condition. The use of solvency opinions in real estate transactions may increase, although this has yet to be seen. Buyers and lenders should continue to perform full lien and judgment searches on the parties to the transaction and affiliated entities, with particular attention given to any identified creditors, even if these creditors have no direct liens encumbering the asset in question. They also may want to consider requesting additional representations from a seller or borrower concerning its financial condition, identifying its significant creditors and confirming that the transfer will not result in insolvency. Although these representations may be of limited value if the party turns out to be insolvent, heavily qualified representations or a refusal to provide such representations may signal potential issues with the transaction. If any of these investigations identify issues or concerns that the seller or borrower may be insolvent or become insolvent, the transaction may be at risk.
    Sellers and borrowers, particularly privately held companies, may not wish to provide details on their financial condition or make additional representations in the transaction documents. Specifically negotiated confidentiality provisions may provide adequate comfort to allow for the sharing of financial or other sensitive data, but a refusal to share any of the necessary information by a seller or borrower may indicate deeper issues.
    Another factor to consider when determining the rights of third-party creditors is the purchase price and whether it represents “reasonably equivalent value.” Property values have been experiencing a continuing decline over the last few years, which has made agreement on current market value increasingly complex. Even when a buyer and seller agree on the price, the transaction may still face challenges from third-party creditors. If challenged on the grounds that “reasonably equivalent value” was not received, a court is likely to look at all factors affecting the price determination. An independent and reputable third-party appraisal may be helpful, but the appraiser should be completely independent and disinterested in the outcome of the transaction. The methodology used by the appraiser will be evaluated and should be an accepted method for the particular asset type in question. If the sale was subject to a bidding process, that information may be important to note, as it may signify the actual market price for such an asset, assuming the highest price was accepted.
    In light of the current economic climate and the issues facing commercial real estate, this change by the title insurance industry is likely to significantly shift the risk of a claim by a creditor to the buyers and lenders. Investors intending to purchase so-called “distressed assets” at very low prices may want to be cautious in assessing and understanding these risks prior to moving forward with a transaction. Buyers and lenders may want to consult with experienced professionals to fully investigate each transaction as thoroughly as possible to identify potential creditors and claims that may be made based on the particular facts and circumstances. While it may be impossible to identify and eliminate all potential claims, with appropriate due diligence, risks can be mitigated—and significant future costs and expenses dealing with claims of third-party creditors may be averted.
    If you have any questions about this Alert, please contact Darrin S. Forbes, Douglas J. Lubelchek, any other member of the Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.
    This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

    Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today’s evolving global markets.
    Specific Questions relating to this article should be addressed directly to the author.

  4. Great info as always…looking for any info on Deutsche Bank
    National Trust Co., that can be used to show a pattern of fraud…
    I have used copies found on this site of fraudulent mortgage assignments from DOCX in GA, by matching names of endorsers,
    The Register of Deeds, in Boston, MA returned my call yesterday, I explained, to them, that I think they have unknowingly accepted Fraudulent Mortgage Assignments, and they are sending me certified copies for my case, at NO COST…we need, now more than ever, to pool info together for everyone to use…I believe I finally have the proof to show RICO, mail fraud, and wire fraud….and as we know RICO is 3x damages, which is very likely to inspire a lender to settle favorably. 2 years and haven’t lost yet…
    Tom

  5. Hey Kim, are you THAT kim thomas?

  6. The ironic part of all of this was thier was a premium charged for all these stated loan and no income no asset loans and any loan that had mortgage insurance was charged more for no income and the title companies should have to pay.If not then they should rebate all the money they collected for these loans over the years to everyone. People refinanced thier loans 2 and in some cases 3 to 4 times and the Title companies charged the borrower again and again and in a lot of cases they did not even charge the reissue rate but the full rate x millions of these loans and refinancings. They were happy to take those premiums when they were issuing the policies. Every insurance company loves to get paid but when it is time for someone else who has a claim to be paid you need a philadelphia lawyer to figure out how many exclusions they have.I have always asked what do you cover? They could save a forest with the paper they generate on what they do not cover.

  7. There is another law suit filed this week ,though not by an insurer, but by Home Loan Bank of Seattle, against AIG, Goldman & a host of other Wall Street bank. I believe their are 11 separate claims filed regarding deception of value of MBS’s with the SEC. The wolves are indeed turing on their own pack.

    I also hope that results of these suits, will provide plenty for the average Joe & Jane caught up in this mess. It all seems to be unraveling rather quickly.
    It is rather funny that they are seeking “arbitration” , which is exactly what homeowners are seeking though loan modifications.

    Thanks to Neil and all the people on this site for keeping this information streaming.

  8. the wolves are eating themselves,,,I hope I can hold out till this all breaks loose. These things are all positive in that anything that makes a principal reduction, or a 0 interest rate loan mod look better to the banks than foreclosure is a step in the right direction…

Leave a Reply

%d bloggers like this: