There was a very favorable development recently in one of my buyback cases. The federal district court in Miami issued a final order that has great potential application to other buyback suits, whether already pending or merely threatened at this point. The ruling is not something that other courts are required to follow, but it can potentially have significant influence on the thinking of other judges. As one client has already noted, this is quite possibly a “true game-changer.”
In a case brought by Lehman Brothers Holdings against one of my clients, Judge King of the Southern District of Florida issued an order dismissing claims against my client. The key elements of the order are that:
1. The facts pertinent to each of the eight loans about which Lehman was suing are so clearly different from one loan to another that they must be adjudicated as eight different suits;
2. Judge King therefore has now dismissed all claims related to seven of the eight loans, granting Lehman leave to re-file them as seven separate suits, each focused on one loan only (a clear disincentive for Lehman to continue to pursue its claims). Each re-filed case will be randomly assigned to one of the district court judges in Miami;
3. The order makes clear that this ruling stems from the fact that each loan requires separate and distinct proof as to liability, and separate and distinct proof of damage. Note that the exact same thing is true of all other loan buyback demands; and
4. Any new cases cannot be consolidated with one another;
We have always felt that we had a number of very strong defenses to aggregators’ claims. We now have a major “procedural” weapon as well.
Think your house has been foreclosed? Think again…
As reported by Michelle Conlin at Reuters, when banks fail to follow through on foreclosure of homes, this has serious, often dramatic ramifications for the homeowner. A person subject to “zombie title” is an individual, who, unbeknownst to him or her, is still the actual homeowner, despite the fact that foreclosure proceedings had begun, and despite the fact that they had not lived in the house, often for lengthy periods of time.
Daren Blomquist, vice president at RealtyTrac was quoted, stating, “The banks are just deciding not to foreclose, even though the homeowners never caught up with their payments.”
We have long been skeptical of most loan “repurchase” or “indemnification” demands made by big banks against the third-party originators (i.e., correspondent lenders) who sold those loans to the big banks many years ago. Our skepticism arises not just from a loan-by-loan analysis of the demands being made against our clients (the correspondent lenders). We are also highly skeptical because of all sorts of issues related to what the big banks did with these loans after acquiring them from our clients.
Those issues include all the assurances that the big banks gave their investors about the accuracy of the loan files and high quality of the loans. They also include the long periods of time between (i) when the big banks would have surely discovered a “breach” if one truly existed and (ii) when any such “breaches” were finally called to our clients’ attention. And, as much as anything else, we are also tremendously skeptical about whether the big banks have truly suffered any damage at all related to these loans, and, if so, whether anything our clients or the borrowers did years ago is the true cause of any such damage. Continue Reading
How can Countrywide/B of A even keep a straight face when it argues that correspondent lenders need to pay it outrageous amounts of money to settle claims for actual or potential losses? Take a look at this latest report of what Countrywide attorneys tell judges when they are defending Countrywide against claims brought by insurers or other parties.
Did Countrywide do its homework?
Think about the position that Countrywide is in when it makes buyback demands on correspondents. It has virtually always re-sold or securitized the loans about which it is complaining. This fact alone presents numerous problems for Countrywide’s claims. Let’s focus for now on just one of them. Did Countrywide review the loan files before re-selling the loans? Which answer is better for it?
As an attorney actively engaged in litigation of many mortgage and banking-related cases at this time, this is not the place for me to offer a detailed discussion of the arguments that can be made against Countrywide. But you can see what a quandary Countrywide/Bank of America is faced with as it tries to deal with the conflicting demands of its many, many lawsuits — some as plaintiff, many more as defendant — in the mortgage-backed securities and mortgage repurchase areas.
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. Continue Reading
Wells Fargo has recently cried foul, claiming that the Department of Justice’s latest lawsuit against it in the Southern District of New York violates the terms of a settlement agreement Wells had previously reached with the federal government. And not just any settlement; Wells Fargo is referring to the infamous “Robo-signing” “deal” among the US government, state attorneys general, and several of the notable “too big to fail” big banks, including Wells Fargo.
Wells Fargo claims it had previously agreed to pay $5 billion to settle its alleged fraud and other wrongdoing in the mortgage loan markets, but in reality there is wide spread criticism to this day over what many believe to have been a sweetheart deal for the big banks. In no small part that is because the big banks are not paying out anything close to the aggregate $25 billion payout amount that has been widely reported.
In this new suit, filed October 9th, the government seeks hundreds of millions of dollars in damages for alleged mortgage fraud violations under the False Claims Act. Preet Bharara, U.S. Attorney for the Southern District of New York said that Well Fargo, “engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting, and deficient disclosure, all while relying on the convenient backstop of government insurance.”
The lawsuit encapsulates more than a decade’s worth of alleged misconduct by Wells Fargo’s as a participant in the Federal Housing Administration direct loan program. The DOJ has alleged that the FHA paid hundreds of millions of dollars in insurance claims on thousands of these mortgages that ultimately defaulted. Continue Reading
At last week’s Mortgage Bankers Association (MBA) annual conference in Chicago, Bob Siegel and I attended a panel discussion on “preventing buybacks.” Virtually the sole focus of that session was on steps that loan originators can take to reduce the likelihood of errors in the origination process.
Accuracy, and elimination of errors, should of course be an objective of loan originators — but the stunning part of the panel discussion that we witnessed was that the MBA conference panelists seemed to believe that any error justifies a repurchase or indemnification demand! Nothing could be further from the truth, legally or factually.
Many Reasons Why A Repurchase Or Indemnification Demand May Be Unjustified
To understand why this is so, consider just a few of the many reasons that a repurchase or indemnification demand might be completely unjustified:
- What if the alleged error did not relate to a material fact?
- What if the alleged error was not the cause of the investor’s loss?
- What if the investor has suffered no loss at all?
- What if the investor easily could have avoided suffering a loss?
- What if the party making the demand does not own the loan, and has made no indemnification payment related to the loan?
- What if the party making the demand does not have a contract with the party receiving the demand?
- What if the demand appears to be late or untimely?
- What if the party making the demand has already been made whole for its loss by some other party, like a mortgage insurer?
These and many other issues may establish that there simply is no legitimate basis on which an investor may seek a buyback payment. And yes, this applies even to full-doc loans going forward, not just the reduced doc loans of years past.
Loan originators must not fall into the trap of believing that they are financially responsible for every error that is subsequently uncovered on a loan application or in a loan file. Working to promote accuracy is great, but correspondent lenders need not be perfect in order to prevent buybacks.
As we noted in a previous blog post, we believe that big aggregators of residential mortgage loans are attempting to revise history when they claim that they believed all along that all risk of borrower misrepresentations fell on correspondents.
We expand on this idea, and comment further on repurchase claims generally, in the article that we authored for The Scotsman’s Guide.
Verification Of Income Not Required For Refinancing
Fannie Mae recently released a program offering an alternative to documenting income for Refi Plus loans where the change in the amount of the monthly loan payments will not exceed 20 percent. Fannie Mae will now accept verification of liquid financial reserves equal to at least 12 months of the new mortgage payment in lieu of requiring that a least one of the borrowers has a documented source of income.
Fannie Mae’s September 14, 2012 Selling Guide Announcement noted that “the positive impact of Refi Plus and DU Refi Plus continues, enabling borrowers who have demonstrated an acceptable payment history on their existing Fannie Mae mortgage loan to refinance and obtain a lower payment or move to a more stable product or shorter term.”
Fannie Mae thus offered these “enhancements” to the underwriting and documentation policies for Refi Plus (manual only) and DU Refi Plus mortgage loans.
In addition to the alternative to income verification, representations and warranties of the lender will be reduced for loans acquired by Fannie Mae on or after January 1, 2013.
These changes include relieving lenders of their obligation to “repurchase” Refi Plus and DU Refi Plus mortgage loans that are in breach of certain underwriting and eligibility representations and warranties if the borrower was not 30 days delinquent during the 12 months following the acquisition date of the mortgage loans.
In addition, if a new appraisal is obtained, the lender is not required to make any representation or warranty as to the value, marketability or condition of the subject property. Continue Reading
Lack of Certainty Facing Lenders
Last week, the Federal Housing Finance Agency (FHFA) announced a new “representation and warranty framework” for conventional loans sold or delivered to Fannie and Freddie after January 1, 2013. In a clear acknowledgment of the lack of certainty facing lenders in this era of rampant repurchase demands, the agency’s announcement sought to clarify lenders’ future exposure to potential repurchase liabilities.
Two key components of the new guidelines are that:
- Lenders will be relieved from repurchase exposure if the loan sold or delivered meets certain performance thresholds (such as if the borrower made three years of consecutive, on-time payments), and
- Exclusions from representation and warranty-related liability will subsequently be detailed for violations of unrelated defaults.