Mortgage Insurer Asks Court to Bless Claim Denials

Editor’s Note: The ankle-biting is rising to a crescendo. Wait till you see what happens next. The insurers are not just alleging misrepresentation or negligence. They are saying that Countrywide and others knowingly originated bad loans. And as I have explained before on these pages they are finally “getting it.”

Bottom Line: The worse the loan, the higher the profit.  Why? Put pen to paper and figure out how yield spread premiums worked at the level of the securities sale to investors. Whenever you have “asymmetry” of information you have profit derived from predatory practices.

Investors thought they were buying investment grade securities. So the investors expected a low yield for low risk. But the loans were at toxic levels which means they were guaranteed to fail. That is higher than the highest “risk.” And they were priced accordingly — sometimes more than 18%, giving rise to a 12+ point spread in principal computed backwards from the rate.

In the principal received from investors versus the principal funded to borrowers, a 12 point spread comes out to something like a 300% yield spread premium that the investment banks pocketed. So they take $1 million from the investors and only fund $250,000-$300,000 in loans. The rest is gravy.

There is no risk when you know the loan will reset to payments higher than the gross income of the borrower. You know for sure what is going to happen.

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.”

5 Responses

  1. usedkarguy

    You are so right – the borrowers did not lie – the originators did.
    And yet the media right away blamed the people – and the media got away with it.

  2. Good … they all need to be sued from here to hell and back.


  3. You will see an action against Wells Fargo Asset Securities Corp. filed within the next thirty days. The case revolves around the misrepresentations made by the LENDERS regarding the borrowers ability to pay and their assets at time of origination. Yes, they are finding out that the borrowers didn’t lie, the originators did.

  4. It would be my expectation that the lenders who had to buy back loans from FNMA/FHLMC or whose mortgage insurance was rescinded; to then go back to the originating source, including the mortgage company, and the appraisers they used.

    I had visions of Angelo Mozello telling Wall Street not to worry about the MBS because All of The Appraisers are Insured.

    Sadly, there were tens of thousands of appraisers rubber stamping inflated prices, and doing so without any thought of asking for a bribe or kickback because they did not even realize the game that was being played.

    Not, the appraisers own insurance carriers are looking to prove appraisal fraud to get out from covering their insured.

  5. When are the investors going to sue for being misrepresented?

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