Investor Suits

Posted by kevin on February 8, 2015 under Foreclosure Blog | Comments are off for this article

Investors dealing with private securitizations or securitizations orchestrated by GSE’s have taken it on the chin in recent federal court decisions.

In an article from the National Mortgage News dated February 8, 2015, the federal district court for the Southern District of Iowa dismissed a complaint by Continental Western Insurance against the FHFA claiming FHFA acted outside its authority in sweeping all profits of the GSE’s (government sponsored entitites such as Fannie Mae and Freddie Mac) into the treasury. The judge found that the plaintiff’s claim was the same as the claims raised by Continental’s parent company, Berkley Insurance, brought in the DC district court. The ruling against Berkley is on appeal to the DC circuit. This case does not intrigue me other than the fact that it shows that plaintiffs with money can afford to forum shop. However, on a practical level, to get a federal judge to rule against a federal entity after the federal taxpayer bailed out the profligate GSE’s is, in my opinion, a stretch.

The more interesting case came out of the federal district court in NJ and was reported in a February 6, 2015 update of the NJ Law Journal . In that case, the Judge dismissed with prejudice most counts in Prudential Insurance’s lawsuit against BOA claiming that BOA sold it more that $2B in fraudulent residential mortgage backed securities.

First, the Judge tossed Pru”s RICO claims. Then, he tossed common law fraud claims asserting that BOA misrepresented the rate of owner occupied mortgages in the offering. The Judge stated that Pru confused buyer’s statements of intent to occupy the premises with indicia of non-occupancy after closing. (I am going to go on the internet and get this opinion because I would like to see the exact wording on this part of the decision). It seems that the Judge may have cut the baloney a bit thin on this specific ruling.

The Judge also tossed common law claims that the appraisals were overstated by stating that Pru did not make a plausible scenario that appraisers conspired to inflate appraisals and that BOA (or Countrywide) knew about this practice. This decision may be attributable to Iqbal and its progeny where claims are tossed on motions to dismiss where no discovery has been produced as yet. Or it may be that Pru could not produce enough evidence on this issue. Another alternative would be that it was not apparent to the the Judge that the appraisals were bullshit.

On the issue of lack of evidence, I could see how such an opinion can be reached. First, our experience has been that for the most part, banks do not produce discovery unless the court forces them. When a judge (or magistrate) actually shows interest in your discovery request, some bank counsel stands there in open court and states that the documents do not exist. On the other hand, they tell you when their discovery is 3 weeks late, that the papers are with the serivcer in California thus implying that they have no control over the documents and have not even seen them. If you have never inspected the documents, how can you say that they never existed???

But I think we have a more fundamental problem when it comes to appraisals. Appraisals are based on comparable values and are, at best, estimates of value. Because they are estimates of value, there is a built in fudge factor. Second, how do you know that the comps are true comps absent going out and reviewing all the properties. You would be forced to re-do thousands of comps. That is not going to happen. Finally getting to my real point, when the bad appraiser fudges the comp, it becomes part of the data base for future appraisals. How do you separate that out, especially ten appraisals down the line. Fudge upon fudge.

Do I believe that appraisers fudged appraisals in the 2003-2007 era. You bet your ass. They wanted the business and mortgage brokers and banks were pushing loans- not reasons not to give the loan. But without a whistle blower, it is going to be damned hard to prove.