Recently, the defendants in FDIC as Receiver for Colonial Bank v. Chase Mortgage Finance Group, et al (Civ No. 1:12-cv-06166) filed a motion for judgment on the pleadings, asking the court to dismiss as time-barred the securities violations alleged against them by the FDIC. In light of the Supreme Court’s holding in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014), the defendants (which include J.P. Morgan, various Citi entities, Deutsche Bank, HSBC, and Credit Suisse, among others) argued that the three-year statute of repose found in Section 13 of the 1933 Act, 15 U.S.C. § 77m, which applies “whether or not the investor could have discovered the violation,” trumps the FDIC’s Extender Statute 12 U.S.C. § 1821(d)(14), enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The defendants’ position exposes a fundamental conflict. In their countless loan repurchase/indemnification suits against the originators from whom they purchased large quantities of loans that they resold and/or securitized, these same entities (and other big banks like them) have vehemently defended the timeliness of claims based on purported violations that occurred as early as, or earlier than, the ones at issue here. In this action, they have distinctly changed their tunes.
The Office of Inspector General (“OIG”) for the Federal Housing Finance Agency (“FHFA”) is urging the FHFA to sue its servicers and lender-placed insurance (“LPI”) providers because Fannie Mae and Freddie Mac have suffered considerable financial harm in the LPI market, possibly as much as $158 million in 2012 alone from excessively priced insurance coverage. FHFA has been conservator of the two government sponsored entities (“GSEs”) since August 2008.
LPI, commonly called “force-placed” insurance, exists because the GSEs require their borrowers to maintain hazard insurance for their homes, thereby protecting the GSEs’ interests in those properties. LPI is ordered by the servicer when it identifies a lapse in the hazard insurance a borrower is required to carry on a mortgaged property. Apparently, the GSEs are in this predicament by paying its servicers the allegedly excessive premiums when borrowers refused to pay the GSEs.
The city of Miami recently sued JPMorgan Chase & Co. in Florida federal court alleging that JPMorgan violated the Federal Fair Housing Act (“FHA”) by engaging in a “continuing pattern” of discriminatory mortgage lending practices in Miami, resulting in a disproportionate number of foreclosures in minority neighborhoods. Ironically, the suit was filed on Friday the 13th, symbolizing the recent run of bad luck for JPMorgan. The suit came only two weeks after the city of Los Angeles asserted the same claims against JPMorgan. In that suit, Los Angeles claimed that JPMorgan’s conduct resulted in a loss of $481 million in property tax revenue.
The case is currently pending before Judge Ursula Ungaro in the U.S. District Court of the Southern District of Florida. The complaint alleges that between 2004 and 2012, JPMorgan made 2,383 loans in minority neighborhoods in Miami that resulted in commencement of foreclosure proceedings. According to data included in the pleadings, Miami has the highest foreclosure rate among the country’s 20 largest metropolitan areas. More importantly, the data revealed that a loan issued in a predominantly minority neighborhood in Miami is about 4.6 times more likely to end up in foreclosure than a loan issued in a neighborhood with a majority of white residents.
On Friday, Federal Housing Finance Agency (FHFA) released its 2013 Report to Congress, revealing recent GSE milestones but anticipating future problems. The annual report is statutorily-required under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which require the FHFA to report on the agency’s plans to “continue to support and maintain the nation’s vital housing industry, while at the same time guaranteeing that the American taxpayer will not suffer unnecessary losses.”
Presented by FHFA Director Melvin Watt, the 2013 Report provides a detailed review of the safety and soundness of Fannie Mae, Freddie Mac, the 12 Federal Home Loan Banks (FHLB) and the FHLB’s Office of Finance. As noted by Watt in his cover letter to the Report “it also details FHFA’s actions as conservator of Fannie Mae and Freddie Mac during 2013, as well as the agency’s regulatory guidance, research and publications.”
Earlier this month, Massachusetts Attorney General Martha Coakley initiated an action against Fannie Mae, Freddie Mac and the Federal Housing Finance Agency for allegedly illegally impeding non-profit foreclosure buyback programs. These buyback programs purchase properties in foreclosure and then resell the properties to the prior owners at an affordable price, helping low-income residents keep their homes.
Coakley alleges that the defendants have “employed policies that restrict the sale of properties owned or guaranteed by Fannie Mae or Freddie Mac, in direct violation of M.G.L. c. 244, §35(C)(h).” The governing “Act Preventing Unlawful and Unnecessary Foreclosures” prohibits creditors from refusing legitimate purchase offers from buyback programs. According to the Complaint, the arms’ length transaction requirements of the GSE Guides and an FHFA directive “effectively preclude the GSEs from dealing with non-profit organizations . . . that offer qualified homeowners an opportunity to ‘buyback’ or lease their homes.”
As we continue to distance ourselves from the advent of the real estate downturn, residential mortgage loan lenders seem to be increasingly willing to explore ways to loan money outside of the “qualified mortgage” arena. For instance, as the author pointed out in a recent N.Y. Times article, lenders are becoming more likely to make jumbo loans (also known as nonconforming loans) to a person who otherwise cannot meet the predominantly rigid underwriting guidelines currently in place.
Since the economic downturn, borrowers generally have had to meet strict requirements in order to obtain a jumbo loan. For example, borrowers have had to have a certain minimum credit score, and self-employed borrowers have been required to provide at least two years of tax returns. For some, these guidelines are onerous and their ability to meet them may not accurately reflect their ability to repay a mortgage. A self-employed borrower who, for example, has just begun a business, may not be able to document two years of income related to the business. However, there appears to be an easing of underwriting standards in the jumbo loan market. Jordan Roth, a mortgage specialist at the GuardHill Financial Corporation explains that lenders are just “having to get a little more creative.” If that new business owner can show that she has previously been successful in a similar business, then lenders may be more willing to give her a jumbo mortgage than in the recent past.
On Friday, May 30, 2014, asserting that “[i]t is axiomatic that banks should not make discriminatory loans”, the City of Los Angeles filed a two-count complaint against JPMorgan Chase & Co. in Federal Court for the Central District of California. Count one of the complaint is brought under the Federal Fair Housing Act, 42 U.S.C. §§ 3601, et seq., while count two is styled as “Common Law Claim For Restitution Based On California Law.”
In the complaint, the City of Los Angeles alleges, among other things, that:
- JPMorgan intentionally targeted residents of predominantly African-American and Latino neighborhoods in Los Angeles for different treatment than residents of predominantly white neighborhoods in Los Angeles with respect to mortgage lending.
- JPMorgan intentionally targeted residents of African-American and Latino neighborhoods for high-cost loans, without regard to their individual credit qualifications and without regard to whether they would have qualified for more advantageous loans.
- JPMorgan intentionally targeted residents of these neighborhoods for increased interest rates, points and fees, as well as for other disadvantageous loan terms.
- JPMorgan intentionally targeted residents of these neighborhoods for unfair and deceptive lending practices in connection with its marketing and underwriting of mortgage loans.
“Robo-signing,” the term coined to refer to bank officials who quickly approved mortgage foreclosure documents without actual knowledge of the validity of the grounds for foreclosure, has been spurring lawsuits and making headlines since as far back as 2010. It was in the news again with the recent settlement by Wells Fargo of another robo-signing lawsuit. In this lawsuit, brought by shareholders against Wells Fargo’s board of directors, the plaintiffs alleged that robo-signing at Wells Fargo was a breach by the individual defendants of their fiduciary duty of loyalty owed to Wells Fargo and its stockholders.
The $67 million settlement requires Wells Fargo to provide down payment assistance to affected home buyers, and counseling support for its customers that are having difficulty making mortgage payments. It also requires Wells Fargo to integrate its operations of residential mortgage servicing in order to ensure consistent management of business.
A former goliath of the non-prime lending market, Aurora Loan Services, LLC (“ALS”), recently resolved a class-action lawsuit alleging that it fraudulently induced distressed California borrowers to enter into purported “workout” agreements to extract unearned payments. ALS was one of many servicing affiliates of big banks that created, and profited off of, various reduced documentation programs, which correspondent lenders originating and funding residential home loans sold to Aurora Bank FSB were required to follow. A subsidiary of Aurora Bank FSB, and affiliate of Lehman Brothers Holdings, Inc., ALS left the mortgage servicing business in the aftermath of the financial crisis of 2007-2008, selling the majority of its remaining servicing rights to Nationstar Mortgage LLC in 2012.
The class-action lawsuit against ALS was pending before Judge Saundra Brown Armstrong of the United States District Court for the Northern District of California. The Amended Complaint contains accusations that ALS took advantage of homeowners who fell behind on their mortgage payments, drawing them into deceptive contracts that required borrowers to make monthly payments in exchange for delaying impending foreclosures. The agreements promised an opportunity for borrowers to obtain mortgage modifications, but ALS allegedly failed to follow through. The lawsuit was consolidated with two other cases and survived various dispositive motions brought by ALS.
Early last week, recently-appointed director of the Federal Housing Finance Agency (FHFA) Melvin L. Watt, announced plans to keep GSEs Fannie Mae and Freddie Mac going strong. This new strategy is in stark contrast to the express goals of his predecessor Edward J. DeMarco, White House officials and other proposed legislation, such as the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, that was aimed at dismantling the GSEs and shifting mortgage-lending risks back to the private sector. In his first speech as leader of the FHFA, Watt presented FHFA’s Strategic Plan for 2014, in which he stressed the Agency’s plan “to manage the present status of Fannie Mae and Freddie Mac” and maintain the dominance of those companies in the mortgage-lending market.