On Thursday, July 31, I will be speaking as part of a panel of business professionals during a live webinar about the continuing repurchase and indemnification risk surrounding mortgage buybacks. This panel will assist mortgage professionals in determining where the greatest exposure of risk lies, and will offer some insightful tips on how best to attempt to shield your company from liability.
“Buyback and Indemnifications: The New Dangers” webinar is hosted by Inside Mortgage Finance, and will take place on July 31 at 2:30pm. During the 90-minute webinar, participants will learn more about:
- What buyback risks exist for GSE seller/servicers and how serious they are;
- What violations the FHA is requesting indemnification on that previously would not have triggered a demand;
- How you can minimize your buyback and indemnification risk for future loans;
- How to respond if a repurchase or indemnification demand is made.
For more information or if you would like to attend, click here.
SunTrust Banks (“SunTrust”) reached a settlement with Federal prosecutors last week in which it agreed to a $320 million settlement for a combination of consumer relief and housing counseling services. SunTrust issued a press release this past weekend outlining the agreement. Specifically, it has agreed to pay $179 million in consumer remediation, $20 million to fund housing counseling for homeowners, $10 million as restitution to the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and $16 million in cash to the United States Treasury.
This settlement is the result of an investigation by federal prosecutors in Virginia into SunTrust’s compliance with the Home Affordable Modification Program. The program allowed banks to modify loans for homeowners struggling to make their payments after the downturn. The prosecutors and investigators alleged that SunTrust made misrepresentations to homeowners and that it intentionally was slow to process borrower applications for mortgage modifications. For instance, prosecutors and investigators alleged that SunTrust misled homeowners about how long it would take to review their qualifications and how they would be treated during “trial periods.” The impact on the homeowners is substantial – thousands saw damage done to their credit scores, had to pay excess interest payments and were unable to look into other ways to ease their financial concerns.
With the mortgage crisis almost a decade in the rear-view mirror, some harmed homeowners are just now starting to see reparations for the transgressions of the country’s largest financial institutions.
Beginning in January 2013, thirteen banks—including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo—settled 2011 and 2012 actions instituted by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve alleging misconduct and negligence in processing loans. Included among the alleged improprieties were “robo-signing” that led to baseless foreclosures, the charging of inflated interest rates and the improper denial of loan modifications.
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.