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

Gotcha! Originators Beware of Baseless Claims

Baseless Claims

Just about every time I think that the demands being asserted on residential mortgage loan originators for mortgage loan “repurchases” or indemnification payments (on account of loans that were originated years ago during the height of the mortgage crisis) could not possibly be any more baseless, yet another claim comes along that proves me wrong.

To date, I would estimate that I and our Bilzin Repurchase Defense Team have reviewed at least 2500 repurchase claims. In doing so, I have long since come to believe that very few of these claims have had any validity-either because the alleged loan level defects were refuted or because the aggregator was unable to adequately demonstrate the defect, or because of higher level problems that prevented an aggregator from justifying its particular demand.

I have also observed a correlation between the passage of time since the mortgage crisis began and the ever increasing lengths that aggregators are apparently willing to go to in what we have often said is their attempt to revise the history of the mortgage crisis.

Originators Beware

Yesterday, I reviewed yet another claim asserted by a “too big to fail” mortgage loan aggregator. The claim was one that I thought epitomized the absolute absurdity of this process and the lengths to which aggregators seem willing to go in order to feed what is increasingly looking like to us to be their Machiavellian profit centers. This aggregator recently contacted an originator and nonchalantly asked if the originator happened to have in its files a copy of the promissory note for the borrower of a loan that had been closed and sold to the aggregator more than 5 years ago.

More than willing to cooperate, the originator promptly provided the aggregator with the requested documents. I’m sure you know what happened next: yes, indeed, the aggregator immediately made a repurchase demand on the originator solely on the basis of its allegedly having failed to deliver the promissory note to this aggregator 5 years earlier!! For almost a full day, I thought that this incident was near the top of my list of all-time bad faith claims.

But then today, one of my colleagues reviewed the mortgage loan files for 2 of 6 or so loan repurchase demand cases, where the aggregator had asserted that the borrowers’ incomes were misstated in loans sold by the originator several years earlier. But it turns out that the reason that each of the borrowers stopped making payments and defaulted was very simple-they had both died years ago.

Today, we are at a point at which the government sponsored entities (GSEs) are churning out claim after baseless claim. The aggregators seem to be of the view that, regardless of whether or not they pay the GSEs in response to these baseless claims, the originators will nevertheless pay the aggregators.

In the meantime, more than 5 years after the mortgage crisis began, aggregators and originators still have something in common — they are afraid to make loans and risk repurchase demands, and our economy continues to suffer. It is time for the GSEs and the aggregators to turn to more productive pursuits.