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Mortgage Crisis Watch

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

Robo-Signing Still Making Headlines As Wells Fargo Settles Another Lawsuit

“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.

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Aurora Resolves Mortgage Modification Class-Action Lawsuit for $5.3 Million

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.

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FHFA Announces Reversal of Plans to Wind Down Fannie Mae and Freddie Mac

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.

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Can Fannie and Freddie Cope Under Pressure?

Last week, the Federal Housing Finance Agency (FHFA) put Freddie and Fannie to the test, and the results were grim. Dodd-Frank mandated “stress tests,” designed to evaluate a financial institution’s ability to withstand an economic downturn, revealed that in a severe recession Fannie and Freddie could require bailouts of as much as $190 billion, a staggering figure considering the $187.5 billion these agencies received in the wake of the last housing crisis.

As dictated by the terms of their previous bailouts, Fannie and Freddie’s excess profits (which were at record highs last year) above minimum net worth thresholds are remitted to the U.S. Treasury. The GSEs’ resulting lack of capital explains their poor performance under pressure.

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Justice Department Keeps its Distance From Szymoniak Mortgage Fraud Lawsuit

As detailed in an August 2013 Salon article by David Dayen and a September 2013 Bloomberg Businessweek article by Karen Weise, West Palm Beach, Florida homeowner and attorney Lynn Szymoniak helped blow the whistle on widespread fraud in the mortgage industry. Over the past few years, Szymoniak has helped the U.S. government recover millions of dollars from major banks that engaged in fraudulent practices such as “robo-signing,” and also won $18 million for herself under the False Claims Act when the U.S. Justice Department intervened in her foreclosure-fraud lawsuit and negotiated a $95 million settlement with Bank of America and other lenders to resolve a false claims case.

But Szymoniak, who is still suing other lenders accusing them of the same fraudulent behavior, is so far on her own in that lawsuit as the U.S. Justice Department has not joined the case. As Jef Feeley and David McLaughlin reported in a recent Bloomberg Businessweek article, while the government can intervene in the case at any time with court permission, Szymoniak’s attorneys have said that so far the Justice Department isn’t interested in getting involved. The Justice Department has not explained why it has so far refused to intervene in the lawsuit, although professor Joan Krause of the University of North Carolina says in the recent Bloomberg Businessweek article that there could be a variety of reasons, including lack of resources, or a determination that the case against the remaining lenders is not particularly strong.

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SEC “Fearful” of Wall Street Banks

Following the financial crisis, the U.S. Securities and Exchange Commission has received sharp criticism from the public for its seemingly weak enforcement of Wall Street’s too big to fail banks. Surprisingly, this sentiment was recently echoed from within the SEC. James A. Kidney, a retiring SEC trial attorney, no longer muffled by his employment with the agency, blasted his supervisors during a retirement speech on March 27 for being too “tentative and fearful” in their enforcement of Wall Street banks and instead “picking on the little guys.” This is particularly troubling because we know from recent experience that megabanks are the biggest risk takers.

Kidney, who had been with the SEC since 1986, pursued securities fraud suits against Goldman Sachs & Co. during his tenure. According to unconfirmed reports from the New York Times’ DealBook, Kidney blamed the commission’s “revolving door” for the lack of meaningful actions against big banks for their behavior. “It is no surprise that we lose our best and brightest as they see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched,” Kidney reportedly grieved. Despite higher-ups apparently believing in the SEC’s mission “to protect investors and to maintain fair, honest and efficient markets,” they fail to follow through.

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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.