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Mortgage Crisis Watch

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

Derivative Suit Filed Against JPMorgan Alleges Culture of Risk

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.

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SEC To Demand More Public Accountability This Year From Wrongdoers In Financial Markets

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.”

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Federal Court Follows Recent Statute of Limitations Decision for Mortgage Buyback Claims

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.

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Dodd Frank Act: The Arrival of the ‘Ability to Repay’ Lending Restrictions

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.

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Mortgage Crisis Penalty for the Real Wolves of Wall Street Could Top $50 Billion

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

FHFA Mortgage Repurchase Lawsuit Against Credit Suisse Dismissed For Failing To Allow Time For Cure

Rejecting an all-too-common strategy among mortgage investors of “shoot first, talk later,” New York state judge Eileen Bransten has dismissed several mortgage repurchase lawsuits originally filed by the Federal Housing Finance Agency (“FHFA”) against a Credit Suisse affiliate, ruling that the suits were filed before Credit Suisse had an opportunity to repurchase the subject loans or otherwise cure the alleged loan deficiencies.

The FHFA had alleged in the lawsuits that Credit Suisse unit DLJ Mortgage Capital, Inc. made misrepresentations about mortgage-backed securities that cost investors $1.4 billion. In dismissing the claims with prejudice, Judge Bransten found that, while DLJ was entitled to a 90-day cure period to buy back the loans after receiving the plaintiffs’ repurchase demands, the FHFA had filed the summonses before DLJ was served with the repurchase notice. Continue Reading

New FHFA Head Will Delay Proposed Mortgage Fee Hike

Former North Carolina congressman and the new head of the Federal Housing Finance Agency (FHFA), Mel Watt, has given the public a sneak peek of how he will lead the FHFA. On December 20 he released a statement expressing his intentions to delay the Agency’s earlier announced plan to increase mortgage fees on loans borrowers seek that will ultimately be sold to Fannie Mae and Freddie Mac.

Fee Hike Originally Proposed by Watt’s Predecessor

Watt, who was sworn in yesterday, replaces Ed DeMarco, who President Obama appointed in 2009 after the agency’s previous head resigned. It was under DeMarco’s tenure that the Agency announced its plan to implement a March/April 2014 fee hike. The so-called guarantee fee would increase by an average of eleven basis points overall. DeMarco explained that the fees were designed to bring more private capital into the market. However, some contend that the fees make little sense since Fannie and Freddie are already so flush with profits. In fact, Fannie and Freddie have been doing so well that they have already paid back almost all of their $187 billion taxpayer-funded bailout.

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NY Appellate Court Reverses Decision on Statute of Limitations for Mortgage Buyback Claims

On December 19, 2013, correspondent lenders were the beneficiaries of a long-awaited common sense ruling on when the statute of limitations begins to run under New York law for purposes of a mortgage buyback claim. The common-sense answer: when the loan was sold by the correspondent lender (as we have been saying all along!).

Statute of Limitations Begins at Breach of Representation

The New York State Appellate Division unanimously reversed Judge Shirley Werner Kornreich’s May 13, 2013 decision in ACE Sec. Corp. Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prods., Inc., 40 Misc. 3d 562 (Sup. Ct. N.Y. Cnty. 2013) which denied defendant-appellant’s motion to dismiss holding that the statute of limitations does not bar plaintiff-respondent’s claims. Reversing Judge Kornreich, the Appellate Division held that the statute of limitations for mortgage put-back claims begins to run on the date when the alleged breach of representations and warranties was made, rather than the later date on which the alleged failure to repurchase occurred.

Specifically, the Appellate Division stated that “[t]he motion court erred in finding that plaintiff’s claims did not accrue until defendant either failed to timely cure or repurchase a defective mortgage loan. To the contrary, the claims accrued on the closing date of the MLPA, March 28, 2006, when any breach of the representations and warranties contained therein occurred.” Continue Reading

FHFA Announces $1.9 Billion Settlement With Deutsche Bank

On December 20, 2013, the Federal Housing Finance Agency (“FHFA”), as conservator of Fannie Mae and Freddie Mac, announced that it will receive settlement payments of $1.925 billion from Deutsche Bank AG in connection with claims of alleged violations of federal and state securities laws related to private-label, residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac.

Settlements “do not constitute any liability or wrongdoing”

The settlement did not “constitute an admission by any of the Deutsche Bank Defendants of any liability or wrongdoing whatsoever” and were therefore favorable, in that sense at least, to Deutsche Bank because admitting wrongdoing could have increased its exposure in private mortgage repurchases lawsuits.

Forced-Place Insurance Policies May Soon Be Tamed

In an article in today’s DBR by John Pacenti, I weigh in on forced-place insurance policies. The article addresses the new restrictions by the Federal Housing Finance Agency that aim to prohibit mortgage services from being reimbursed for expenses associated with captive reinsurance arrangements. Pacenti also quotes a prior blog post that I co-authored with associate Anthony Narula.

Please click here to read the full article.