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.
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.
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 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.
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.
Adding to JPMorgan Chase’s widely publicized recent legal woes, shareholder Bradley P. Miller filed a derivative suit against the bank and its directors in California federal court on January 23, 2014, as a result of the $20 billion in fines the bank paid last year for nearly a decade’s worth of alleged wrongdoing. “Defendants put their own short-term financial interests ahead of the long-term financial interests of the company resulting in billions of dollars of penalties and fines,” the complaint alleges. The derivative suit exemplifies the reasons why the reputations of so many Wall Street banks are in tatters.
The complaint criticizes Chase’s top executives for creating a “culture of risk“ underscored by the allegedly fraudulent marketing and sale of mortgaged-backed securities. In addition, the complaint alleges that the bank’s executives breached their fiduciary duty, committed waste, and were unjustly enriched in connection with the “London Whale” trades, manipulating the energy market, instituting questionable overseas hiring and credit card billing practices, and helping to launder money for Bernie Madoff’s Ponzi scheme. The complaint indicates that in addition to the financial cost that the $20 billion in fines has had on the company, as a result of these activities there has been substantial damage to Chase’s reputation, the cost of which is not quantifiable.
SEC Chair Mary Jo White announced last week that the SEC is changing its protocol relating to admissions of guilt in settlements with wrongdoers in the securities markets. Historically, SEC practice was to settle cases against entities and individuals without requiring admissions of guilt. This was thought to promote swifter settlement of claims, payment of civil penalties, and removal of wrongdoers from positions of power in the market. Beginning in June of 2013, the SEC began to modify this policy in cases involving harms imposed on large numbers of investors, where the perceived need for public accountability and acceptance of responsibility is of heightened importance.
Policy Shift: SEC To Require Admissions of Guilt In Certain Cases
During her keynote speech at the 41st Annual Securities Regulation Institute in California, White stated that the SEC will now require admissions of guilt in cases revealing “egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer poses a particular future threat to investors or the markets, or where the defendant engaged in unlawful obstruction of the Commission’s processes.” This new attitude toward offenders like financial institutions, hedge funds, and brokers stems from public and media demands to hold wrongdoers publically accountable in the wake of the financial crisis. In September of last year, the agency required J.P. Morgan Chase & Co. to admit violations of securities laws as part of a $200 million settlement, confirming White’s mandate that SEC settlements “have teeth and send a strong message of deterrence.”
ACE Securities Case Determined that Statute of Limitations Begins at Sale of the Loan; Other Courts Have Begun to Follow Suit
We recently posted about a critical ruling out of New York’s intermediate state appellate court, the case of ACE Securities Corp. v. DB Structured Products, Inc., 977 N.Y.S.2d 229, 231 (N.Y.A.D. 1st Dept. Dec. 19, 2013). In that case, the Appellate Court held that, under New York law, the statute of limitations on a mortgage buyback claim begins to run when the loan was sold by the correspondent lender. We noted that the decision was extremely significant to originators, sellers, and investors in mortgage-backed securities because it makes the statute of limitations an even more formidable barrier to mortgage put-back claims. We predicted that other courts would take note of the decision and follow suit. On January 10, 2014, a federal court, the United States District Court for the Southern District of New York, did just that.
In Lehman XS Trust, Series 2006-4N, by U.S. Bank National Association v. Greenpoint Mortgage Funding, Inc., No. 13 Civ. 4707(SAS), 2014 WL 108523 (S.D.N.Y. January 10, 2014), Judge Shira A. Scheindlin followed ACE Securities and held that, under New York law, the Trust’s suit for breach of representations and warranties against by GreenPoint was barred by the six-year statute of limitations.
The days of exotic mortgage programs like “no doc” and balloon loans may be over.
Earlier this month, the long awaited (and by many lenders and experts, dreaded), lending restrictions codified in the Dodd Frank Act finally went into effect. The rules, promulgated by the Consumer Financial Protection Bureau (CFPB), attempt to constrain lenders’ abilities to fund loans to borrowers who lack adequate repayment capacity.
Rule Requires Lender to Determine Loan Repayment Capacity; Failure to Fulfill Requirements Has Legal Implications
During the Housing Bubble, lending only to those borrowers who could reasonably afford the properties they sought to acquire became somewhat of a novelty. The Ability to Repay Rule seeks to get back down to brass tacks in lending by requiring a mortgagee to make a “reasonable and good faith determination” of a borrower’s repayment capacity each time a loan request is made, by requiring lenders to utilize reliable third-party verification of underwriting factors such income, assets, employment, credit history, and monthly obligations. Lenders must retain documents supporting each underwriting decision for at least three years after funding the loan.
The real wolves of Wall Street–sixteen of America’s largest banks–could end up shelling out more than $50 billion to secure settlements from the federal government in connection with their alleged roles in the mortgage crisis. Of this amount, up to $15 billion would go directly to affected homeowners in the form of cash payments and/or loan reductions.
Penalties Calculated Against JPMorgan Settlement
As first reported by The New York Times, industry insiders are using JPMorgan Chase’s record $13 billion settlement as a benchmark to gauge each individual bank’s potential liability. Specifically, analysts calculated the amount of JPMorgan’s settlement payment as a percentage of the total amount of residential mortgage securities issued by the bank between 2005 and 2008. That percentage was then used to determine how much each of the other banks might have to pay to buy peace from federal investigators.
At the top of the list is Bank of America, the country’s second-largest lender and owner of beleaguered subprime lender, Countrywide Financial, with $11.7 billion in penalties and an additional $5 billion in direct payments to affected homeowners. Morgan Stanley could face a $3 billion settlement figure, while Goldman Sachs’s liability could reach $3.4 billion. Across the pond, Britain’s Royal Bank of Scotland could be saddled with a $10 billion settlement–something that may be hard for the British government to swallow given that it owns a majority stake in the bank. Continue Reading