Insurance/Credit Default Swaps

Posted by kevin on July 21, 2015 under Foreclosure Blog | Comments are off for this article

A fundamental rule of law is that a plaintiff could only be paid once for an injury. So, if your lender has been paid the amount of the mortgage note, it should be correct that that lender cannot file a foreclosure action and take your house. Why? Because the lender is not owed anything/

If you read the prospectuses and pooling and servicing agreements of many of the NY securitized trusts that were prevalent from 2002-2007, you will note that the higher tranches (most conservative investments) contained a insurance component whether it be straight out insurance against default or a credit default swap (CDS). Moreover, the lower tranches were wiped out if a certain percentage of loans failed.

In discovery in most of my foreclosure cases, I request copies of all letters from the trustee to the investors. I want to know how many defaults have occurred with trust, and how the trustee is dealing with the various tranches. I also ask whether the trust had procured any insurance or CDS’s. Based on the unpublished Gomez case in NJ which relies on a 1st Circuit BAP case that was effectively overruled by a later 1st Cir. case, I never get that discovery. But the fact remains, if the plaintiff in your case has been paid, how can he come into court and ask to be paid again.

Last week, I had the opportunity to talk with a person who worked for a “too big to fail” bank and an investment house that was very active in the securitized mortgage business. She confirmed that whenever a loan went into default, the first thing that her employer did was to make an insurance claim. And her employer was paid on those claims.

A basic tenet of insurance law is that if the insurer pays a claim, then the insurer steps into the shoes of the insured and can go after the wrongdoer (in this case, the borrower). This is called subrogation.

Two questions? If a plaintiff is being paid twice, isn’t that against the law? And, why are the courts not interested in what amounts to a) fraud on the court, b) consumer fraud, c) theft d) criminal activity? (take your pick). The answer you get is that the borrower took the money, the borrower owes the money. However, in the above scenario, the borrower does not owe the money to the plaintiff, but to the insurer. So, why pay the plaintiff twice?

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.

Round and Round We Go

Posted by kevin on December 2, 2014 under Foreclosure Blog | Comments are off for this article

Prior to 2008, I viewed many appraisals with a bit a disbelief. The economy was growing at 3-4% but real estate prices in NJ were going up by 20%. Something had to give and it sure did.

When I started doing foreclosure defense work, I was shocked to see the mortgages that were being given out based on highly questionable income. How could a guy that worked as a manager at Home Depot get a $500,000 mortgage? Moreover, who, in their right mind, could believe that that person was making $10,000 per month? Welcome to the world of stated income loans.

Any sane person would conclude that the manager at Home Depot was not making $120,000 per year. One would think that an underwriter would come to that same conclusion. How, then, could the employer of that underwriter lend a half million dollars to that manager. If not based on income, it had to be based on the value of the collateral. Enter the appraiser.

More than a few appraisers were fudging their appraisals. The problem that I found was that it was difficult to get an expert to testify that another appraiser was playing games. A tight little group. At any rate, I was not able to go after any appraiser in my 5 years of foreclosure defense litigation.

That brings us up to an article in today’s WSJ about inflated appraisals. Banks are auditing loan applications, or so they say, and are seeing more and more questionable appraisals. As prices have leveled, appraisers are claiming that loan officers and real estate brokers are putting the heat on them to come up with values to justify the loans. Isn’t that fraud??? or predatory lending?? or both. The OCC and Freddie Mac are investigating.

The article goes on to say that surveys of real estate agents show that 31% lost deals because of low appraisals in March, 2012; 29% lost deals in March, 2013, but only 24% lost deals in March, 2014. Those numbers indicate that more and more appraisers are playing ball, but at the same time complaining that the real estate agents and bank officers are squeezing them

Finally, the article says that banks are turning to AMC’s (appraisal management companies) to assign appraisal work. This gets the loan officer (a source of pressure on the appraiser) out of the loop. However, appraisers now are complaining that the AMC’s are twisting their arms to come up with more favorable appraisals.

It’s funny. The appraiser blame loans officers, real estate agents and AMC for their own illegal activity. Sort of reminds me of my sons when they were little. Whenever I caught them doing something wrong, it was always someone else’s fault. More importantly, the question is what did the banking industry and their agents and the government learn from the 2008 meltdown. Looks like not much.

SEC to the Rescue?

Posted by kevin on March 29, 2014 under Foreclosure Blog | Comments are off for this article

Earlier this week, we commented on the DOJ audit relating to financial fraud and, more specifically, mortgage fraud. The report concluded that the DOJ dropped the ball on these issues. One of the excuses used by the DOJ was that mortgage fraud (notwithstanding the President’s task force included mortgage fraud) was not really within its purview, but should be considered securities fraud. This was kick the can over to the SEC.

Oddly enough, the SEC announced that it is investigating whether a recent Wall Street boom in complicated bond deals is opening up new opportunities for fraudulent behavior. My Goodness. Is there gambling going on at Rick’s Cafe Americain? Keeping with the Casablanca theme, the SEC is lining up the usual suspects-Barclay’s , Citigroup, Deutsche Bank, Goldman, Morgan Stanley, RBS and UBS.

Now, I am hoping that the investigation is more than a press release. After all, the SEC was rather slow on the uptake in their investigation of irregularities following the mortgage crash of 2008. But, maybe they learned something from the prior go around.

A WSJ article indicates that the SEC is referring to the securities as CLO’s (collateralized loan obligations). It is not clear whether the SEC is investigating deals involving consumer credit or CDO type deals. Irrespective, the SEC must investigate and aggressively go after wrongdoers. Wall Street was emboldened by the tepid response by regulating agencies, While making billions of dollars, Wall Street practically wrecked the economy, got bailed out, and there were scant criminal or regulatory repercussions. So, is the plan, lay low for a couple of years, and let the games begin anew. The SEC has an opportunity to prove that its priority is to protect the public as opposed to laying the groundwork for getting its higher ups great jobs at mega law firms or in investment banking houses. You will know the answer based on the results of this and other investigations. I am not optimistic.

Wells Fargo Robosigning

Posted by kevin on March 16, 2014 under Foreclosure Blog | Comments are off for this article

Back in February, 2012, the six largest servicers entered into a $25 billion settlement with the US DOJ and the AG’s from 49 states. Thank god. No more robo-signing. No more servicer fraud. A great day for the consumer.

Not really. I started to see evidence of robo-signing after that “historic” settlement. In fact, almost all endorsements now are on allonges, and all the allonge forms are identical irrespective of the lender. What a coincidence. I am sure that Judges who saw hundreds of these “new” allonges made the same observation. One could only hope that those observations were made on the record.

Moreover, the $65-70 million earmarked to reduce principal on NJ mortgages never really materialized. I had heard from HUD counselors that the banks were walking away from underwater second mortgages (which they would have done anyway) and getting credit toward their share of the $65-70 million.

So, my take was that the $25 billion settlement may not have been a total canard, but certainly was a lot less than met the eye

Last week, in a case pending in the federal district court for the Southern District of New York, the borrower’s counsel made reference to a 150 page Foreclosure Attorney Procedures Manual which, according to the NY Post, details a procedure for processing [mortgage] notes without endorsements and obtaining endorsements and allonges. That would be fraud on a massive level. However, a Wells Fargo spokesman denied that the manual could be used to order improper documents, and admonished the public not to believe their own lying eyes, but to take WF’s word for it. Well, at least I can now sleep peacefully.

I have a few WF cases. I also have access to the manual. The next few nights of reading may prove very interesting. If so, the next few months in discovery will be worth the price of admission. I plan to take depositions including attorney depositions in the proper cases. Stay tuned. I look forward to reporting back to you

Enough Blame to Go Around

Posted by kevin on November 18, 2013 under Foreclosure Blog | Comments are off for this article

Millions and Millions of dollars were made by mortgage brokers, originating lenders, servicing companies and Wall St, firms selling residential mortgaged backed securities (“RMBS”) . Wall St made even more money by slicing and dicing the RMBS and turning them into collateralized debt obligations (“CDO”). But the assistance of one industry was necessary for the successful sale of RMBS’s and CDO’s. Who could they be? The rating agencies. You see, without an A rating or better, the best instititutional salesmen on Wall St could not unload these securities. So, without the likes of Standard & Poor, Moody’s Investors and Fitch Ratings, we may not have had the real estate bubble and the Great Recession.

In previous blogs, we have pointed out the that government has been slow on the draw going after Wall St investment houses and the Too Big to Fail Banks. But at least they have gotten off a few shots. On the other hand, governmental action has been almost non-existent against the rating agencies.

With the statute of limitations running out, we may be seeing some push back. In the last week, the liquidators of two failed Bear Stearns hedge funds filed suit against S&P, Moody’s and Fitch accusing them of fraudulently misleading investors about the quality of their ratings. The liquidators are looking for over a billion dollars in damages.

The complaint was filed in the New York Supreme Court (in NY, this is the trial level court). The liquidators are looking at the ratings in light of the types of mortgages that were in the mix, the lack of analysis by the rating agencies as proof of a lack of due diligence, and statements made by the employees of the rating agencies in emails where they joked about the quality (or lack thereof) of the mortgages that were part of a deal.

The liquidators filed bare bones complaints in early summer to beat the statute of limitations, and this past week added a 140+ page complaint.

What does this mean if you are a borrower in NJ? Unfortunately, at this time, not much. Many judges do not want to hear the details about the confluence of misdeeds by brokers, mortgage originators, rating agencies, sponsors of trusts, trustee who refuse to bounce back bad mortgages, and servicers who jerk around homeowners who want to get a modification so they can continue to live in their homes. They are granting summary judgment (defenses of borrower thrown out without the need for a trial) to lenders in foreclosure cases with increasing frequency. I have not tried a case in well over 18 months- not from lack of effort on my part. But, perhaps the case against the rating agencies, together with all the news about large banks settling with the SEC or Justice Department for billions of dollars, may cause one or more appellate panels to find consumer fraud or predatory lending; to question whether those allonges that all started to look alike about a year ago are not examples of fraudulent robo-signing; and to force plaintiffs to prove their cases with competent, credible evidence based on personal knowledge. We did get decisions like that back in 2010 and 2011. Let’s go back to the good old days.

Bank of America- Jury Weighs In

Posted by kevin on October 28, 2013 under Foreclosure Blog | Comments are off for this article

This past week, a jury in Manhattan found Bank of America (BOA) liable for mortgage fraud. BOA, as successor to the infamous Countrywide Home Loans, was found to have fudged its system for detecting bad loans which were sold to investors. They even had a name for the scheme- High Speed Swim Lane- acronmym “Hustle”. 57% of the Swim Lane loans defaulted, and the government claimed that 43% of the loans were defective or fraudulent. In addition, the jury found Rebecca Mairone, who oversaw the program, liable. Just an aside- when you call a loan program “Hustle”, I think that you are flirting with danger.

Now, these loans were originally Countrywide Loans which were sold to investors through Fannie and Freddie. BOA bought Countrywide in 2008 for $2.5 billion. The Hustle program ended just prior to the purchase. The case is entitled US ex rel O’Donnell v. BOA, et al because the case stems from a whistleblower action brought by former Countrywide executive, Edward O”Donnell. The penalty phase of the case will be going forward. The government is looking for a shade under $1 billion in damages. Because fraud is involved, the Judge could tack on punitive damages and fees.

This case is significant for two reasons: first, we are talking about a jury verdict. What we commonly see is a settlement usually way before trial to reduce costs to the bank and , more importantly, with no admission on the part of the bank of liability or wrongdoing. Second, the verdict is against the bank and an executive. It puts a face on the wrongdoing. Moreover, it will have a strong chilling effect on bank executives who are actively involved in hustling the public and even those that just look the other way when wrongdoing is rampant.

The case was brought under the FIRREAA. This was a statute that was promulgated during the Savings & Loan crisis of the late 80’s and early 90’s. The benefit is that the statute of limitations is 10 years. BOA may take the case up on appeal to challenge the applicability of that statute more so to attack the long statute of limitations.

Clearly, a victory for the investors and possible all consumers since we have a jury verdict on fraud. How NJ judges will consider this fraud when dealing with borrowers is another question. Borrowers and investors are two sides of the same coin. If borrowers did not get the predatory and often fraudulent loans, investors would not be sold those same loans. It is rather incongruous that courts blame the banks for the loans vis-a-vis the investors, but blame the borrowers for taking the bad loans as opposed to the originating lenders for granting them.

BOA- Another Shoe Drops

Posted by kevin on August 14, 2013 under Foreclosure Blog | Comments are off for this article

Last week, I blogged about the lawsuit against Bank of America pending in Massachusetts. Within a few weeks of that suit, another group of homeowners in Colorado brought a lawsuit in the federal court alleging that BOA and its contractor, Urban Lending Solutions, ran a scheme to deny permanent modifications in contravention of the federal RICO Act.

The RICO Act was initially used to allow federal law enforcement more flexibility in going after organized crime. Over the years, however, its use has been extended to what would be considered business type activities. Moreover, the RICO statute provides for a private right of action (meaning individuals and not just the government can sue under the statute) and allows legal fees to a prevailing plaintiff.

Interestingly enough, the complaint filed in Colorado cites statements made by former BOA employees in the Massachusetts case. It alleges that BOA and Urban Lending Solutions conspired, in some cases, to push borrowers into more expensive “in house” mods rather than HAMP mods. It also alleges that in other cases, BOA advised borrowers to send their financial information to Urban Lending Solutions. Urban became the “black hole” for documents sent by homeowers. Ultimately, the mod applications were denied in a wholesale manner.

BOA and Urban Lending Solutions have denied any culpability. Notwithstanding with 2 federal lawsuits filed in the last two months both alleging widespread fraud in the modification area, regulators and members of Congress are taking notice.

Irrespective of the outcome of these specific cases, it is my opinion that if the courts in Colorado and Massachusetts rule unequivocally that borrowers have standing to sue in HAMP/mod situations, the defense bar (lawyers who represent homeowners) will have a big victory.

We Shall See re: JP Morgan Comes Quickly

Posted by kevin on November 17, 2012 under Foreclosure Blog | Comments are off for this article

In my last blog, I observed that the SEC was in negotiations with JP Morgan to settle the agency’s action relating to fraudulent loans sold to investors by Bear Stearns. I questioned whether JP Morgan would get the proverbial “slap on the wrist” or whether the sanctions would be substantial. I was not holding my breathe for substantial sanctions.

Yesterday, it was announced that the fine would be $300 million. Sounds like alot of money, but you have to put it into context. Bear Stearns probably did hundreds of mortgaged backed securitized trusts from 2003 to 2007. In fact, the Schneiderman lawsuit in NY alleges that even after a memo circulated Bear Stearns in June, 2006 which indicated that 60% of AHM loans in its trusts were at least 30 days delinquent (of course investors not told that), Bear Stearns issued at least 30 more trusts.

My review of most mortgaged backed securitized trusts indicates the average trust contains at least a billion dollars of loans. So, from June, 2006 until taken over by JP Morgan in or about March, 2008, Bear Stearns issued over $30 billion of securitized trusts. That means investors paid Bear Stearns or its affiliates over $30 billion dollars for bad deals. $300 million/ $30 billion. Now, I am not a whiz at math, but that sounds like a fine of a whopping 1% of what was earned in the last 18 months of the alleged ongoing fraud (issues dried up by the end of 2007. Just want to send out an “Atta boy” to the SEC.

To put this in perspective, your home probably has lost 30% of its value since 2007-8.

US sues Wells Fargo

Posted by kevin on October 10, 2012 under Foreclosure Blog | Comments are off for this article

Yesterday, the feds filed suit in Manhattan against Wells Fargo for bilking the Federal Housing Administration out of hundreds of millions of dollars. The complaint alleges misconduct going back to 2001 whereby WF recklessly issued mortgages and made false certifications about their condition to FHA which then insured the loans. Many of these loans went bad and FHA was left “holding the bag”.

I love the quote from Preet Bharara, the US attorney who said.”Yet another major bank has 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”.

Banks need a license from the State or federal government to do business. That license comes with strings attached. The bank has to follow the law, including the directives of its regulators. One for the fundamental regulations involving mortage loans is that the lender is required to make a mortgage loan based primarily on the ability of the borrower to repay the loan and not on the value of the collateral. Deficient underwriting (or no underwriting standards) leads to making loans that people cannot afford to repay. This not only hurts the borrower, but his or her community, the people who bought the loans and the government which insured those loans.

So what the government is alleging is that WF hired a lot of incompetent people who ignored the basic tenets of mortgage lending, lent money to people who could not afford to pay it back (definition of a predatory loan), and lied to the FHA about it. Frankly, it appears that the US attorney is giving WF the benefit of the doubt in his statement by inferring that WF was just negligent or reckless. Many believe that WF and the other ‘too big to fail banks’ knew exactly what they were doing – they were making lots of money and passing the bad paper on to investors and the government (= taxpayers= you and me) who got stuck with the loses.

We are seeing a slew of activity by prosecutors on the eve of the Presidential election. One must wonder why it took so long. I hope that when the election is over and the dust has cleared, these lawsuits do not evaporate.

NY AG goes after JP

Posted by kevin on October 2, 2012 under Foreclosure Blog | Comments are off for this article

Eric Schneiderman, the New York AG appointed by Obama to co-chair the federal/state probe into the 2008 mortgage meltdown (called, I believe, the Residential Mortgage Backed Securities Working Group), filed suit against JP Morgan Chase alleging widespread fraud by the company’s Bear Stearns unit in the sale of mortgaged backed securities.

You may recall that Schneidermann was a real carnivore who threatened to go after not only the big banks but the securitized trusts. Together with AG Biden in Delaware and the tough women AG’s in California, Massachusetts, Illinois and Arizona, Schneiderman was standing up to the big banks on improper/illegal servicing practices. Then, the President appointed Schneiderman to the chair of the Working Group, the $25 Billion settlement went through, the servicer/banks are still conning the public into thinking that they are effecting meaningful loan modifications, and nothing much happened on the litigation front until yesterday. Forgive me if I appear cynical, but isn’t there an election in about a month.

Cynicism aside, this appears to be a positive event. It is alleged that Bear Stearns, which was bought by JP Morgan, defrauded investors by packaging and selling mortgages that they knew had a high likelihood of defaulting. Damages to investors are in the billions of dollars. Schneiderman is seeking unspecified damages. If Schneiderman aggressively litigates this matter, a substantial recovery could be in the cards. More importantly, a positive result can lead to more actions be AG’s and investors. One can only hope. On the other hand, if we see a settlement for pennies on the dollar, similar to the $25 Billion settlement, we can conclude that the government just wants to sweep this continuing mess under the carpet. Time will tell.

The federal statute of limitations is 5 years, and most state statutes of limitations for these types of offenses is six years. So time is running out. Let’s hope that the Working Group and the various AG’s “man up” and go after the banksters.

Fannie/Freddie v. the Banks

Posted by kevin on September 7, 2011 under Foreclosure Blog | Comments are off for this article

A few weeks ago, things were looking good for the “too big to fail” predatory banks.  The feds (FDIC) were ready to make a deal.  Most of the State AG’s were backing off.  The carnivore, Schneiderman, was dumped from the leadership group of AG’s.  In NJ, the big lenders got the OK to continue foreclosing with new and improved certifications (looked eerily like the old and unimproved certifications to me).  A couple of zigs and a couple of zags, and the banks could get out of this mess.  Then, last Friday the Federal Housing Finance Agency, the overseer of FANNIE MAE and FREDDIE MAC, filed lawsuits against every major lender in sight claiming fraud and demanding upwards of $50B.

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Blame for All but the Borrower Pays

Posted by kevin on August 30, 2011 under Foreclosure Blog | Comments are off for this article

Lenders are licensed in New Jersey.  That means that doing business- mortgage business- is not a right but a privilege.  Yes, you can make money as a lender or mortgage broker.  But you have an obligation to the public, an obligation to the State.

People, even it appears sometimes judges, forget this simple fact when they are confronted with with continuing mortgage crisis.  They pay lip service to the idea that there is enough blame to go around; but when it is time to pony up, only the borrower is left to face the music.

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