Appraisal Fraud and Facts: Essential to Securitization Scam

The REMICS are mirror images of the NINJA loans — no income, no assets, no job

the borrower did not realize that the false appraisal and other deficiencies in underwriting had shifted the risk of loss to the homeowner and the investors

Editor’s Notes: Our economy and the economic structure in other countries is stuck because of the false appraisal reports that supported funding of at least $13 trillion (U.S. only) of loans that were so complex that the Chairman of the Federal Reserve, Alan Greenspan didn’t understand them nor his staff of more than 100 PhDs. They were intentionally opaque because complexity is the way you get the other side of the “deal” (the buyer) to accept your explanation of the transaction. It also is designed to avoid criminal penalties even when the scheme unravels. Getting a Judge or Jury to understand what really happened is a challenge that has been insurmountable in both civil and criminal cases and investigations.

As stated in the 2005 petition to Congress from 8,000 appraisers who did not want to “play ball” with the banks, the appraisers were faced with a choice: either they submit appraisal reports $20,000 higher than contract and earn more money for each appraisal and earn  more money through volume, OR they won’t work at all.

Developers, mortgage brokers, and the “originators” (sales organization that pretended to be the lender), sellers and homeowners needing cash in an economy where there wages and earnings were not keeping up with the cost of living —- all reacted with glee when this system went into action. As “prices” rose by leaps and bounds — fed by a flood of money and demands for more mortgages — everyone except the banks ended up crashing when the money stopped flowing. That is how we know that it was the money that made prices rise, rather than demand.

So most appraisers were both stuck and pleasantly enjoying incomes 4-10 times what they had previously received, and obediently submitted appraisal reports that were in fact unsupportable by industry standards or any other standards that a reasonable and rational lender would use — if they were lending their own money. By lending money from investors the risk of loss was entirely removed. The originators got paid regardless of whether the mortgage was paid, or went underwater or caused the homeowner to execute a strategic default.

By using the originators as surrogates at the closing, the appraisal report was accepted without the required due diligence and confirmation that would be present if you went to the old style community bank loan department. The fact is that there was NO UNDERWRITING involved as we knew it before the securitization scam. The “extra” interest charged to No DOC loans (usually 3/4%-1.5%) and the premium interest charged on NINJA (No income, no assets, no job) loans was sold to borrowers on the premise that the “lender” was taking a higher risk. But the truth is they didn’t do any due diligence or underwriting of the loans regardless of whether or not the borrower was submitting information that confirmed their income, assets and ability to pay.  Thus the premium for the “extra risk” was based upon a false premise (like all the other premises of the securitization PONZI scheme).

The normal way of judging the price of a loan (the interest rate) was the perceived risk composed of two elements: ability to repay the loan, and the value of the property if the loan is not repaid. The banks that foisted the securitization scam upon the world got rid of both: they did nothing to confirm the ability to repay because they didn’t care if the borrower could repay. And they intentionally hyped the “value” of the property far above any supportable level as is easily shown in the Case Schiller index.

This is where PRICE and VALUE became entirely different concepts. By confusing the homeowner and hoodwinking the investors with false appraisals, they were able to move more money into the PONZI Scheme, as long as investors were buying the bogus mortgage bonds issued by fictitious entities that had no assets, no income and no prospects of either one. The REMICS are a mirror image of NINJA loans.

The value of the property was not the same as the prices supported by the false appraisal reports. The prices were going up because of the sales efforts of the banks to get homeowners giddy over the the numbers, making them feel, for a few moments as though they were more wealthy than they were in reality. But median income was flat or declining, which means that the value was flat or declining.

Thus prices went up while values of the homes were going down not only because of the median income factor but because of the oversold crash that was coming. Thus the PONZI scheme left the homeowner with property that would most likely be valued at less than any value that was known during the time the homeowner owned the property, while the contract price and appraisal report “valued” the property at 2-4 times the actual value.

The outcome was obvious: when all was said and done, the banks would be holding all the money and property while the investors, taxpayers, and homeowners were all dispensable pawns whose losses came under the category of “tough luck.”

While this might seem complex, the proof of appraisal fraud is not nearly as difficult as the explanation of why the banks wanted false appraisals. In the civil actions for wrongful lending or wrongful foreclosure, the homeowner need only show that the lender intentionally deceived the borrower as to the value of the property.

And the lack of actual underwriting committees and confirmations is essentially the proof, but you would be wise to have an appraiser who can testify as an expert as to what standards apply in issuing an appraisal report, to whom the appraisal report is addressed (i.e., the “originator”). Then using the foundation for the standards apply it to the property at hand at the time the original appraisal report was issued. It might also help if you catch the “originator” getting a part of the appraisal fee (like Cornerstone Appraisals, owned by Quicken Loans).

The borrower testifies that they were relying upon the “lender” representation that the loan had been carefully reviewed, underwritten, confirmed and approved based upon market conditions, ability of the borrower to repay and the value of the property. After all it was the “lender” who was taking the risk.

Thus the borrower did not realize that the false appraisal and other deficiencies in underwriting had shifted the risk of loss to the homeowner and the investors whose money was used to fund the loan — albeit not in the way it was presented in the prospectus where the REMIC was the supposed vehicle for the funding of the loans or the purchase of the loans.

Everyone in the securitization PONZI Scheme got paid. When you look at it from the perspective described above then you probably arrive at the same conclusion I did — all that money that was made and paid and not disclosed to the borrower changes the dynamics of the deal and the undisclosed compensation and profits should be paid to the borrower who was the party with the real risk of loss.

And in fact, if you look at the Truth in Lending Act, THAT is exactly what it says — all undisclosed compensation (which is broadly defined by the Act) is refundable with treble damages. Why lawyers have not taken action on this highly lucrative and relatively easy case to prosecute is a mystery to me.

Because of the statute of limitations applied in TILA cases, the TILA cause of action might not survive, especially in today’s climate, although more and more  judges are starting to see just how badly the banks acted. I therefore recommend to attorneys to use alternative pleading and add counts under other federal statutes (RICO, etc) and state statutes of deceptive lending, and common law fraud. The action for common law fraud, is the easiest to prosecute as I see it.

The interesting aspect of this that will lead to early settlement is that the pleading is simple as to the elements of the cause of action and can easily survive a motion to dismiss, the facts are clearly going to be in dispute which makes survival on a motion for summary judgment a much higher probability, and in discovery you have a nuclear option: since your cause of action is for return or sharing of the unlawful booty that was paid, plus treble, punitive or exemplary damages, discovery into all the different parties who made money in the chain is far easier to argue than the usual defensive foreclosure case.

The other thing you have is the possibility of stating a cause of action to force the retention of the property, to protect the homeowner in the collection of damages rendered by the final verdict. A lis pendens might be appropriate, and the bond need not be much more than nominal because unless the bank or servicer has a BFP to buy the property, you can easily show that your client is already posting bond every month they pay the utilities and maintain the property.

The compensatory damages would be a measure of the difference between the actual value of the deal and the deal that was offered to the homeowner. In simple terms, it could be that the appraisal report was $250,000 higher than the actual value of the property. As a result, the damages include the $250,000 plus the interest paid on that $250,000 and where appropriate, the loss of the house in foreclosure, plus interest from the date of the fraud (i.e. the closing), attorney fees, and costs of the action.

This action might also have special applications in commercial property cases where the appraisals are known to have come in much higher than the owner or buyer had ever expected. In some cases the “appraisal” actually changed the terms of the contract on the assumption that the property was worth much more than the original offer.

The Narrative Has Shifted: Take Advantage of it

Your allegations of intentional misdeeds, fabricated documents and forgeries have new life now that the SEC is hot on the trail of the wrongdoers in a very public way. As the news sinks in more and more Judges, lawyers and experts and forensic analysts will see their role more as a commitment to justice than just helping out a homeowner in distress.

It just didn’t make sense that anyone would loan money in a deal where they knew there would be no payback. My allegations rang hollow to many people, who felt that despite the many distractions and defects contained in the paperwork behind the foreclosure glut, it was the borrowers who made the financial crisis happen. Now we see more and more people taking another look.

For those of us who serve the judicial branch of government, it is no longer a dance to delay the inevitable. It is, as it has always been, a confrontation with giant corporations whose reach into the corridors of powers enabled them to suck the life out of an ailing economy.

No society has ever persisted without a vibrant growing middle class. It will be a very long time before we succeed in reversing the damage wreaked by Goldman Sachs and other investment banking houses who acted without any sense of conscience, morality or even compliance with laws that society passed to enable their existence. But now, we have a chance. Let’s not waste this opportunity. Don’t let the pretender lenders get control of the narrative again.

The reality is that many, perhaps most loans were created according to specifications set by Wall Street, not by industry underwriting standards. The reality is that people were hired to lie and cheat and deceive homeowners into investing their homes into this salacious scheme. The reality is that the appraisals were false, and were given greater credibility by the reasonable borrower assumption that no lender would lend money on a bad deal where the property value was intentionally overstated, and that lenders would and did strive to comply with the requirements of the Truth in Lending Law, where the responsibility for appraisal verification, income verification, quality, viability, and affordability are BY LAW the responsibility of the Lender. Little did these hapless homeowners know, TILA was a joke to these players.

So now reality sets in. securities that were rated investment grade were junk and are worth far less than their sale price. Homes that were rated as high value were really still the same value as the market had shown before the flood of money and bird dogs looking for signatures on documents, even if the signatures were forged and even if the borrower was dead.

The finance system depends upon confidence. Confidence is based upon belief in the market values and practices in the marketplace. There is only one correction that is viable now. It is the simple recognition that neither the securities nor the properties they were based upon, had any new “value added.” It is the simple recognition that we had to accept when the NASDAQ that flew near 5,000 is really worth only 2,000, long after the boom and bust of that era. Any attempt to saddle the homeowners, the taxpayers or the investors with anything other than the reality of fair market value will undermine our financial system, and ultimately our future and the future of generations to come.

Ohio Sues Rating Firms for Losses in Funds: Fraud Catching Up with Swindlers

NOW AVAILABLE ON KINDLE/AMAZON
WHY THIS IS IMPORTANT TO FORECLOSURE DEFENSE AND OFFENSE: OK I know the last thing you want to hear is how complex this scheme was. But if you can get over the intimidation factor, you will see how the lawsuits filed by individual homeowners, attorney generals, and class actions are picking apart the whole scheme, coming up with the inconvenient answers that Wall Street is working to avoid and that many government officials are too lazy or paid off or whatever to get involved.
So here we focus on the rating agencies and you might be asking why do I care if I wasn’t an investor who bought those empty bonds that funded my loan? The reason is that others with far greater resources than you are doing your work for you.
The SINGLE transaction, starting with the sale of the bond to the investor and then to the sale of the financial loan product to the homeowner and then ending with the false foreclosures and unconscionable proceeds of credit default swaps could ONLY have been achieved with the active participation from the rating agencies.
By selling their reputation for objectivity to the highest bidder, by misusing their skill in assessing credit risk,  the rating agencies enabled those bonds to be sold under the pretense that they were AAA sound investments. But for that the mortgage meltdown would never have occurred. But for that, you would not be in the upside down position, or delinquency, default or foreclosure in which you find yourself.
But for the free flow of free money there would have been no pressure to get rid of it in order to make Wall Street’s unconscionable profits. And without that pressure, housing prices would have remained relatively stable instead of shooting up to unprecedented (by any measure) unsustainable levels that were not reflective of what the homeowner would get when Wall Street’s scheme was over.
Your home loan was rated by these rating agencies. They looked the other way and changed underwriting standards from common sense to common fraud. The ONLY way the bonds sold to investors could have been rated so high was by rating the underlying mortgages and notes. No REAL analysis would have done anything except raise red flags bringing the rating down to junk. Just starting with the appraisal” on the house which was also a form of rating, no reasonable person could possible look at the history of housing prices and believe that the 30% jump in 4 months was sustainable. Nobody using their own money would fund a deal based on that. It is only because the originating “lenders” (i.e, straw-men, conduits) were not using their own capital that these loans were made.
We were all duped by the appraisers and the rating agencies who sold their integrity to the highest bidder. And in the process of tragedy of astonishing severity is unfolding, getting worse and fooling the American public — until it reaches each and every one of us, which it will.
At some point the homeowners should be suing the rating agencies and appraisers for their part in all this. The counterclaim is both fraud in the inducement and fraud in the execution. Fraud in the execution because you thought you were just taking out a loan when in fact you were purchasing a financial loan product that was a security promising you passive returns whose value was intentionally misrepresented. Fraud in the inducement because had you known the true value of the property you would never have assumed that you could cover the loan terms, which were also illegal and predatory.
The game is on. If you reach the truth before Goldman et al are done, you can stop it, reverse it, and set the country back on the path of confidence in an economy that is based upon something other than $500 trillion in derivative vapor.
November 21, 2009

Ohio Sues Rating Firms for Losses in Funds

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

“A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share,” he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption,” he said.

A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades.

One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that “wildly inaccurate ratings” had led to roughly $1 billion in losses.

And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining “how these agencies could get it so wrong and whether they violated California law in the process.”

As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998.

To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal “could be structured by cows and we’d rate it.”

Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say.

“If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and Lee University School of Law. “The First Amendment doesn’t extend to the deliberate manipulation of financial markets.”

The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities.

At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

“Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.”

To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk securities that both issuers and rating agencies knew to be little more than a house of cards,” the complaint states.

CONSCIENCE, COMMITMENT AND COURAGE

By GRETCHEN MORGENSON

Published: November 1, 2008

AS a senior mortgage underwriter, Keysha Cooper was proud of her ability to spot fraud and other problems in a loan application. A decade of vetting mortgage documents had taught her plenty, she says.

But as a senior mortgage underwriter at Washington Mutual during the late, great mortgage boom, Ms. Cooper says she found herself in a vise. Brokers squeezed her from one side, her superiors from the other, she says, and both pressured her to approve loans, no matter what.

“At WaMu it wasn’t about the quality of the loans; it was about the numbers,” Ms. Cooper says. “They didn’t care if we were giving loans to people that didn’t qualify. Instead, it was how many loans did you guys close and fund?”

Ms. Cooper, 35, was laid off a year ago and is still unemployed. She came forward to discuss her experiences at the bank in order to help shareholders recover money from WaMu executives.

Ms. Cooper is one of 89 employees whose stories fill a voluminous complaint filed against officers of the company by the Ontario Teachers’ Pension Plan board, a big shareholder. Topping the list of defendants is Kerry K. Killinger, the WaMu chief executive who was ousted in mid-September.

WaMu was seized by federal regulators in late September, the biggest bank failure in the nation’s history. It was sold to JPMorgan Chase for $1.9 billion.

The shareholder complaint depicts WaMu’s mortgage lending operation as a boiler room where volume was paramount and questionable loans were pushed through because they were more profitable to the company.

When underwriters refused to approve dubious loans, they were punished, she says.

MS. COOPER started at WaMu in 2003 and lasted three and a half years. At first, she was allowed to do her job, she says. In February 2007, though, the pressure became intense. WaMu executives told employees they were not making enough loans and had to get their numbers up, she says.

“They started giving loan officers free trips if they closed so many loans, fly them to Hawaii for a month,” Ms. Cooper recalls. “One of my account reps went to Jamaica for a month because he closed $3.5 million in loans that month.”

Although Ms. Cooper couldn’t see it, the wheels were already coming off the subprime bus.

“If a loan came from a top loan officer, they didn’t care what the situation was, you had to make that loan work,” she says. “You were like a bad person if you declined a loan.”

One loan file was filled with so many discrepancies that she felt certain it involved mortgage fraud. She turned the loan down, she says, only to be scolded by her supervisor.

“She told me, ‘This broker has closed over $1 million with us and there is no reason you cannot make this loan work,’ ” Ms. Cooper says. “I explained to her the loan was not good at all, but she said I had to sign it.”

The argument did not end there, however. Ms. Cooper says her immediate boss complained to the team manager about the loan rejection and asked that Ms. Cooper be “written up,” with a formal letter of complaint placed in her personnel file.

Ms. Cooper said the team manager told her to “restructure” the loan to make it work. “I said, how can you restructure fraud? This is a fraudulent loan,” she recalls.

Ms. Cooper says that her bosses placed her on probation for 30 days for refusing to approve the loan and that her team manager signed off on the loan.

Four months later, the loan was in default, she says. The borrower had not made a single payment. “They tried to hang it on me,” Ms. Cooper said, “but I said, ‘No, I put in the system that I am not approving this loan.’ ”

Brokers often tried to bribe Ms. Cooper to approve loans, she says. One offered to pay $900 to send her son to football summer boot camp if she would approve a loan that had been declined by a host of other lenders. “I told him no and not to disrespect me like that again,” Ms. Cooper says.

Hidden fees meant brokers could easily make between $20,000 and $40,000 on a $500,000 loan, Ms. Cooper says.

“WaMu was allowing brokers to get 6 to 8 percent off one loan,” she says. “If I had a loan where the borrower was already tight and then I saw the broker is getting $10,000 or $20,000, I would cut their fees back. They would get so upset with me.”

Ms. Cooper says that loans she turned down were often approved by her superiors. One in particular came back to haunt WaMu.

Vetting a loan one day, Ms. Cooper says she became suspicious when a photograph of the house being bought showed one street address while documents deeper in the file showed a different address. She contacted the appraiser, and recalls that he said that he must have erred and that he would send her the correct documents.

“So then he sent me an appraisal with a picture of the same house but this time with the right number on it,” Ms. Cooper recalls. “I looked the address up in our system and could not find it. I called the appraiser and said, ‘Please investigate.’ ”

The appraiser came back, reporting that a visit to the California property had found everything in order and in agreement with the original appraisal. “I was so for sure that it was fraud I wanted to get on an airplane,” Ms. Cooper says.

The $800,000 loan was approved, but not by Ms. Cooper. Six months later, it defaulted, she says. “When they went to foreclose on the house, they found it was an empty lot,” she recalls. “I remember clear as day this manager comes over to me and asks, ‘Do you remember this loan?’ I knew just what she was talking about.”

Rejecting loan after loan, however, gave her battle fatigue. “The more you fight, the more you get in trouble,” she says. She was written up three or four times at WaMu.

After WaMu’s mortgage lending unit laid her off, she applied for work in its retail banking division. She was turned down, she suspects, because of the critical letters in her personnel file.

Ms. Cooper’s biggest regret, she says, is that she did not reject more loans. “I swear 60 percent of the loans I approved I was made to,” she says. “If I could get everyone’s name, I would write them apology letters.”

CHAD JOHNSON, a partner at Bernstein, Litowitz Berger & Grossmann, is lead counsel for shareholders in the suit. He said: “Killinger pocketed tens of millions of dollars from WaMu, while investors were left with worthless stock.” With WaMu gone, he added, “it is all the more important that Killinger and his co-defendants are held accountable.”

The lawyer representing WaMu and Mr. Killinger did not return a phone call seeking comment.

Ms. Cooper hopes to return to the mortgage business soon. “I loved underwriting because it’s about being able to put a person in their dream home,” she says. “But messing these borrowers around was wrong.”

FORECLOSURE DEFENSE: WHISTLE BLOWERS PROVIDE HELP

Ex-Capital One employee files whistleblower lawsuit

Thu Jun 12, 2008 5:49pm EDT

NEW YORK, June 12 (Reuters) – A former underwriter who says she was forced to resign after blowing the whistle on fraud at Capital One Financial Corp’s (COF.N: QuoteProfileResearchStock Buzz) subprime mortgage unit filed a $51 million lawsuit against her former employer on Thursday.

According to the suit filed in U.S. District Court in Manhattan, Rachel Steinmetz said she was forced into an “involuntary resignation” by her superiors in retaliation for refusing “to approve fraudulent, unlawful and bad loans” and reporting the activities to her superiors and authorities.

Capital One did not immediately return a call seeking comment.

Steinmetz had worked as a senior underwriter at GreenPoint Mortgage before its December 2006 acquisition by Capital One, according to the lawsuit.

She claims she was forced by superiors to approve loans that contained fraudulent information and that her bosses waited until she was out of the office to approve loans that she had denied.

In June 2006, she said she was forced to resign after her employers made her work environment intolerable.

Steinmetz reported her concerns about illegal activity to the New York State Banking Department and accused her former employer of violating Sarbanes-Oxley and banking “whistleblower” protections by forcing her to resign, according to the lawsuit.

Capital One shuttered GreenPoint Mortgage last August in the midst of the subprime mortgage crisis. It had acquired the unit less than a year earlier as part of its $13.2 billion deal for North Fork Bancorp Inc.

Steinmetz is seeking compensation for lost wages, bonuses and benefits of no less than $1 million and punitive damages of at least $50 million, plus interest and costs, according to the suit. (Reporting by Emily Chasan and Bill Berkrot; editing by Jeffrey Benkoe)

Foreclosure Defense: Countrywide Ruling Can be Cited as Persuasive Support for Bad Lending Practices

COUNTRYWIDE SUED FOR IMPROPER LENDING PRACTICES BY ITS SHAREHOLDERS: GOOD MATERIAL HERE FOR BORROWERS TO ALLEGE IN THEIR LAWSUITS AND DEFENSIVE ACTIONS

In these posts I am trying to keep pace with the events unfolding on the investor side of the Mortgage Meltdown. That is because these lawsuits are more sophisticated than the usual fair you find with lawyers representing individual borrowers in foreclosure defense, bankruptcy or non-judicial sales.

Our theme is simply this: lender practices went astray because of lack of supervision, failure of regulation, improper oversight by stockholders and congress, and direct collusion with the even more sophisticated Wall Street firms offering “securitization” of risk products that removed the risk element from the loan underwriting process. The result was predictable — lending standards not only fell, they were smashed under a cloud of plausiable deniability. 

countrywide_class_action_defense_stay_ord

Note the article below and in particular, the bold sections which this editor has added.

May 15, 2008

Judge Says Countrywide Officers Must Face Suit by Shareholders

Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Plaintiffs also identified “numerous red flags” that would have warned directors of increasingly risky loans made by Countrywide, according to the judge, who rejected a motion to dismiss the suit. “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

Hundreds of mortgage companies have failed in the last year or so, but few executives or directors have taken responsibility. That makes the ruling significant, said Blair A. Nicholas, one of two lawyers at Bernstein Litowitz Berger & Grossmann representing the plaintiffs.

“It is a critical step enabling Countrywide and its shareholders to hold accountable the officers and directors who looted the company and were responsible for its devastating collapse,” Mr. Nicholas said.

Countrywide shareholders have lost billions of dollars since 2007 when its shares hit a high of $45.03. They closed on Wednesday at $4.85.

“As institutional investors, it is our duty to seek recourse when a company’s directors engage in practices that are not in the best interests of shareholders,” said Christa S. Clark, chief legal counsel of the Arkansas Teacher Retirement System, the lead plaintiff in the case. “We are pleased with the court’s ruling as it enables the shareholders to move forward with our case and remedy this wrong.”

A Countrywide spokesman declined to comment on the ruling.

The plaintiffs in the case said they hoped to recover money for shareholders from Countrywide officials named in the case who sold $850 million in stock from 2004 to 2007. The plaintiffs contend that the directors and officers dumped shares even as the company spent $2.4 billion to repurchase its own stock in late 2006 and early 2007.

The chief executive of Countrywide, Angelo R. Mozilo, has argued that his $474 million in stock sales during the three-year period complied with securities laws under a planned selling program. But he revised the program, known as a 10b5-1 plan, several times, each time increasing the shares to be sold.

As a result, the judge wrote: “Mozilo’s actions appear to defeat the very purpose of 10b5-1 plans,” created to allow corporate insiders to sell stock regularly and without direct involvement.

Gerald H. Silk, who also represents the plaintiffs, said: “Corporate fiduciaries cannot expect to evade liability by blaming a general market downturn when there is specific and systematic misconduct taking place right beneath their noses.”

The suit names 14 current and former directors and officials as defendants; it is known as a derivative action because shareholders of Countrywide are suing its officers and directors on behalf of the company.

Lawyers for the plaintiffs said that they would ask the judge to expedite discovery so that they can get testimony before the proposed purchase of Countrywide by Bank of America takes place. The deal is expected to close in the third quarter.

Senator Charles E. Schumer, Democrat of New York, asked the Federal Trade Commission on Wednesday to investigate whether Countrywide took advantage of borrowers who filed for bankruptcy protection to try to keep their homes.

In the letter to William E. Kovacic, the F.T.C. chairman, Mr. Schumer said, “An investigation by the Federal Trade Commission would help pull the curtain back on a hidden corner of the existing foreclosure crisis, and could help stem the tide of homeowners who are now unnecessarily being forced into bankruptcy and foreclosure.”

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