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Mortgage Crisis Watch

Business and legal issues affecting: loan repurchases | mortgage-backed securities | mortgage insurance

Judge Denied Bank of America’s Motion to Dismiss $850M Mortgage Fraud Case

Last week, Magistrate Judge David S. Cayer of the U.S. District Court for the Western District of North Carolina denied Bank of America’s motion to dismiss the Security and Exchange Commission’s claims against it in SEC v. Bank of America Corporation, et al. The SEC’s complaint is founded upon allegations that “[t]he Bank of America  entities misrepresented and omitted certain material facts regarding an RMBS [issuance], backed by more than $855 million of residential mortgages, known as BOAMS 2008-A, that was offered and sold in 2008.” Continue Reading

Recently Unveiled “HOME Forward” Housing Act May Signal the End of Fannie and Freddie

Momentum in housing-finance reformation picked up speed last month as the House Financial Services Committee unveiled the proposed Housing Opportunities Move the Economy (HOME) Forward Act of 2014. The proposed HOME Forward Act was introduced by Rep. Maxine Waters, who stated that the Act provides “an opportunity to address some of the fundamental flaws of the current system, by ending the perverse incentives created by Fannie Mae and Freddie Mac’s ownership structure and providing an explicit government guarantee that is paid for by industry.”

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Ninth Circuit Rules National Banks are Residents Only of Their Home State

The United States Court of Appeals for the Ninth Circuit (encompassing nine Western states and two Pacific islands) has held that for purposes of diversity jurisdiction a national bank is a citizen only of the state in which its main office is located, and not of every state where it does business, or even the state of its principal place of business. The 2-1 decision came in a case involving Wells Fargo, which the Ninth Circuit held was a citizen of South Dakota, the location of its “main office” (as set forth in its articles of association), not California, the location of its principal place of business.

As Circuit Judge M. Margaret McKeown wrote in the majority opinion, “[t]he relevant statute is ambiguous, the courts are split on the question, and the Supreme Court has not squarely decided the issue.” The statute at issue is 28 U.S.C. § 1348, which says banks are residents “of the states in which they are respectively located.” The Ninth Circuit noted that the statute contains “sparse text” and that the U.S. Supreme Court previously determined the word “located” to be contextually ambiguous.

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Wells Fargo Employee Admits Role in $40.8 Million Straw Buyer Scheme

Last Friday, a former Wells Fargo branch manager, sales manager and loan officer, Robert Serao, pled guilty to conspiracy to commit wire fraud. The charge stems from Serao’s involvement in a $40.8 million mortgage fraud scheme during his time at Wells Fargo. Allegedly working in concert with at least nine others, Serao used “straw buyers” to obtain underwriting approvals of what in actuality were fraudulent loan applications.

In the pre-2008 mortgage boom, if a potential homebuyer lacked sufficient credit to obtain the necessary loan, unscrupulous loan officers and real estate brokers enlisted (or sometimes created) an individual with good credit (i.e., a “straw buyer”) to pose as the loan applicant, in the stead of the actual buyer. In exchange for allowing his name and credit profile to be used in connection with the loan application, the straw buyer received a kick-back from the loan proceeds. Meanwhile, officers such as Serao, who approved the loans, benefitted from increased commissions from loans to borrowers that, but for the scam, would not have qualified for the loan for which he or she was applying.

Serao faces a maximum potential penalty of 30 years in prison and a $1 million fine for his involvement in the conspiracy.

New Bill Poised to Revamp Fannie Mae, Freddie Mac

Following months of negotiations that involved collaboration between Republicans and Democrats, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) announced Tuesday that the Senate Banking Committee had reached an agreement on the framework to revamp Fannie Mae and Freddie Mac. Since the financial meltdown, the future of the agencies has largely remained uncertain. A full draft of the bill is scheduled to be released within days followed by a committee vote shortly thereafter.

“This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past,” said Crapo of Idaho, co-author of the bill.

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Bank of America’s $8.5 Billion Settlement Will Not Be Delayed by AIG

Late last month, a New York state judge denied AIG’s request to delay approval of Bank of America’s $8.5 billion settlement with private investors in connection with certain mortgage-backed securities that had soured. Bank of America agreed to the settlement in June 2011 in order to resolve claims brought by institutional investors such as Black Rock, Metlife and Allianz SE’s Pimco. The investors alleged that Countrywide, acquired by Bank of America in 2008, misrepresented the quality of 1.6 million mortgages underlying 530 mortgage-secured trusts purchased by the investors prior to the U.S. housing market collapse.

On January 31, 2014, Justice Kapnick delivered a partial victory to Bank of America when she approved the settlement, except for a portion concerning modified mortgages. Certain opponents of the settlement claimed that Bank of America should be required to repurchase the modified mortgages. Kapnick found that Bank of New York Mellon, the trustee overseeing the trusts, failed to take this factor into account when agreeing to the settlement.

Shortly thereafter, Kapnick was elevated to a New York appellate court. However, before leaving the bench, she ordered a five-day delay before her order on the settlement was officially recorded.

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First Horizon Reaches Mortgage Loan Settlement With Freddie Mac

There is now yet another settlement in the mortgage loan industry to report. First Horizon National Corp. announced last week that it has entered into a definitive resolution agreement with Freddie Mac regarding loan repurchase issues. The agreement purportedly settles all representation and warranty claims related to loans sold by First Horizon to Freddie Mac from 2000 to 2008.

The settlement agreement follows an agreement with Fannie Mae that First Horizon entered into last year, and is part of First Horizon’s ongoing efforts to unwind the mortgage business the company sold in 2008. The amount that First Horizon will pay to settle its disputes with Freddie Mac was not disclosed, but public filings indicate that First Horizon released an additional $30 million of mortgage repurchase reserves in the fourth quarter of 2013, from the previously disclosed $195 million, and also increased its pending litigation reserve to $60.5 million from $21.1 million. First Horizon also lowered its total estimated potential liability from outstanding litigation to $180 million from $242 million in the third quarter of 2013.

The agreement is the latest in a string of settlements that banks have reached with Freddie Mac and its larger sibling, Fannie Mae.


Bank of America Foreign Exchange and Mortgage Practices Under Investigation

On Tuesday, Bank of America disclosed in its annual report with the US Securities and Exchange Commission (SEC) that “government regulators” in North America, Europe and Asia are investigating its foreign exchange and mortgage practices and that the U.S. Department of Justice (DOJ) and state attorneys general are also investigating its handling of mortgage loans and residential mortgage-backed securities (RMBS). The filing stated that one U.S. Attorney’s office intended to recommend to the DOJ that it bring a civil suit against Bank of America affiliates for their securitization of RMBS’s. Separately, Bank of America revealed that the U.S. Attorney for the Eastern District of New York is investigating whether the banking institution complied with a Federal Housing Administration program that helps lenders meet the demand for FHA-insured mortgages.

Bank of America also revealed in the SEC filing that its litigation expenses rose to nearly $6.1 billion, up more than a billion dollars from previous estimates at the end of the third quarter.

This filing comes less than a month after a New York judge approved an $8.5 billion settlement reached in 2011 between Bank of America and institutional investors that resolved claims brought by holders of Countrywide Financial Corp. securities. The Bank of America investigation should come as no surprise. Eight banks and eleven entities have now disclosed that they are similarly being investigated by global regulators.


Wells Fargo Gives Subprime Borrowers Another Chance

Wells Fargo has announced that it plans to begin originating FHA-backed loans for borrowers with credit scores as low as 600. This new cut-off is 40 points below Wells Fargo’s current floor, and 20 points below what has traditionally been considered to constitute a “subprime” borrower.

After the collapse of the housing market, faced with rampant repurchase liability and crushing losses on their books, lenders dramatically tightened their underwriting standards to avoid further losses. The qualified mortgage rules which entered into effect this year further discourage subprime lending, especially to borrowers with high debt-to-income ratios. As a result of these post-bubble policies, a large class of potential homebuyers, those with low-to-moderate incomes and/or deficient credit histories, have been largely denied access to funding for several years.

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FHFA Says Fannie and Freddie Still Take on Risky Mortgages

Fannie Mae and Freddie Mac have continued to spend billions of dollars on questionable mortgage loans despite previous alerts to potential issues with their appraisals, the Federal Housing Finance Agency’s Office of Inspector General said Thursday.

According to a new report, the mortgage giants ignored warnings from the FHFA’s data portal about underwriting violations, such as unknown property values or unverified appraiser’s licenses, on over $107 billion in mortgage loans that they purchased between June 2012 and September 2013, years after the mortgage crisis first began. The OIG, the FHFA’s watchdog, issued its criticisms as part of its analysis of how Freddie and Fannie are utilizing appraisal data.

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