Earlier this year, a United States District Court judge for the Southern District of Florida (Judge James Lawrence King) severed and dismissed 7 out of 8 mortgage repurchase claims filed by Lehman Brothers Holdings, Inc. against a residential mortgage originator because Lehman was attempting to demand the repurchase of 8 separate loans in a single complaint. Initially, the claims had been asserted in a single count and dismissed as an impermissible “shotgun” style complaint—an unclear mass of allegations. When Lehman attempted to re-file, the court later ruled that the lack of commonality in circumstances surrounding the origination of separate loans “makes them all but impossible to be adjudicated together.”

Recognizing that each individual loan was unique with respect to the location and date of the loan, the identity of the borrower, and the home being purchased, compounded by the varying proof Lehman would need to show to establish each claim, the Florida court required that the 7 dismissed claims be re-filed in completely separate lawsuits. The 8th claim was later dismissed as well for lack of jurisdiction in the federal court.

Colorado Judge effectively affirmed Florida dismissal

Subsequent to the dismissal in Florida, Lehman attempted to re-consolidate the 7 dismissed claims in a single action pending in the District of Colorado. After reviewing the record in the Florida proceeding, the District Judge in Colorado (Judge Christine M. Arguello) denied Lehman’s motion to consolidate. Holding that the 7 claims lacked common questions of law and fact to warrant consolidation, the court effectively affirmed the Florida ruling, finding that “the cases involve different brokers, borrowers, property, and loan products, defects, and documentation. Further, each case may require divergent proof of damages.” Just like Judge King in Florida, Judge Arguello was not persuaded by the mere fact that all of the individual loans were sold to Lehman pursuant to the same loan-purchase agreement; instead, the court came to the logical conclusion that each individual claim required separate and distinct legal analyses.

As other big banks like Lehman Brothers continue to file lawsuits against smaller loan originators, and attempt to cast blame on the smaller lenders for following the lending guidelines that banks like Lehman themselves established and promoted, we have seen and expect to see more attempts to “bundle” large numbers of claims arising from defaulted mortgages. We also expect that courts will continue to hold that loan buyback claims must be dealt with individually on a loan-by-loan basis, either as separate mini-trials within the same case, or as separate lawsuits entirely.

Lehman is demanding millions of dollars from non-profits

As widely reported, in the latest Lehman bankruptcy “fundraiser,” managers of the Lehman estate are now demanding millions of dollars from non-profit retirement homes, colleges and hospitals.  Lehman claims that it was somehow “shortchanged” by multiple non-profit organizations that were forced to pay to exit derivatives that were unwound as a result of Lehman’s filing for Chapter 11 protection.

Before the financial crisis, governments and non-profits purchased derivatives known as interest-rate swaps, which had the potential to lower the cost of borrowing. But after Lehman filed for bankruptcy, the market for some of the municipal bonds that was tied to the swaps collapsed, and nonprofits and local and state governments had to pay more than $4 billion to Wall Street banks to exit the swaps.

You might reasonably question whether the nonprofits and governmental agencies were made aware of the risks by Lehman and its Wall Street brethren when entering into these transactions. But what Lehman questions is why the nonprofits and local and state governments paid “only” $4 billion.

Lehman is now knocking on these nonprofits’ doors, demanding additional payment.  In addition to the base amount to unwind the swaps, Lehman is demanding 14% annual interest on alleged unpaid swap debts, which is the LIBOR rate plus 13.5% (the controversy over the fixing of the LIBOR rate notwithstanding).

Why spend money researching disease?

In one example,  the Buck Institute for Research on Aging, in Novato, California, paid Lehman $2 million in October 2008 to cancel a swap contract used to manage fluctuating interest rates.  Lehman, however, says it now wants $12.1 million more, as well as at least an additional $4.7 million in interest.  The amount Lehman is currently seeking is more than half of what Buck spent last year researching Alzheimer’s, Parkinson’s and other diseases.

But it seems that from Lehman’s point of view, why spend money to fight diseases when you can use that money to pay an entity whose spectacular collapse helped trigger the downturn in the US housing market that is continuing to this day.

Some non-profits are fighting back

While some entities are settling with Lehman, others, such as Havenwood-Heritage Heights which runs a retirement community in Concord, MA, refuse to accede to Lehman’s demands.

Lehman’s tactics in unwinding the interest rate swaps are strikingly similar to the strategy it has employed against its former correspondent lenders in its many repurchase demands. Some nonprofits, such as Havenwood-Heritage Heights, are fighting back. We continue to encourage loan originators to do so as well.

Freddie Mac Streamlined Modification

Freddie Mac has announced the immediate implementation of its Streamlined Modification program, a no-document modification program offered to severely delinquent borrowers.  The implementation of the program, originally set to begin July 1, came six weeks earlier than expected in an effort to expedite financial relief for potentially thousands of distressed families.

Under the program, servicers are required to evaluate and send to eligible borrowers a Streamlined Modification letter and Trial Period Plan Notice.  To be eligible, a borrower must be at least 90 days, but no more than 720 days, delinquent on mortgages that are at least 12 months old and meet certain other criteria.  Borrowers who receive solicitation letters can simply elect to submit the modified payment to begin the trial period without submitting a response package.  Borrowers who successfully complete the trial period may enter into a permanent modification.

The Streamlined Modification enables servicers to modify a borrower’s mortgage by adjusting interest rates, extending payment terms to 40 years, and providing principal forbearance for certain underwater borrowers.

In a press release Freddie Mac announced the date change was made because it is “focused on adding momentum to the housing recovery by giving distressed borrowers more options to avoid foreclosure.”

Both Freddie Mac and Fannie Mae are aligned on streamlined modification under the Servicing Alignment Initiative.

Mitigating Alleged Damages Resulting from Default

Following the housing boom, the mortgage industry has seen a flurry of repurchase demands and indemnification requests lodged against loan originators by major national banking institutions, investors, and GSEs such as Fannie Mae and Freddie Mac.

More often than not, the parties making such demands inflate their alleged damages and fail to mitigate the damages they claim.  In fact, servicing analysts have customarily included corporate and interest advances through foreclosure when computing damages, instead of alleging their actual damages were equal to the unpaid principal loan balance.

When litigating or settling repurchase demands, loan originators should consider whether servicers properly mitigated their alleged damages.  Repurchase claims could be barred in whole or in part by servicer’s failure to maintain and sell the mortgaged property for its full value, timely notify originators of default or foreclosure, and properly service the defaulted loan.

As many borrowers started to lose their jobs and the housing market began to decline, more and more borrowers re-evaluated their options.  During this time, it was not uncommon for servicers to receive hardship letters from borrowers pleading for re-consideration of their loan modification application, who were often told they do not qualify with little explanation.  In many instances, programs such as Freddie Mac’s Streamlined Modification could have benefited both parties.

Despite the fact that loan modification programs existed in the years following the demise of the housing market, the most common outcomes were still foreclosures and short sales.

It should also be mentioned, however, that loan originators take the position that a loan modified by a servicer without the originator’s involvement is not the same loan that was sold and therefore is no longer subject to repurchase claims.

Nonetheless, the unwillingness of Fannie and Freddie to properly service defaulted loans and otherwise adopt programs like Streamlined Modification sooner has resulted in their failure to mitigate the damages they now allege.

Fannie and Freddie are a day late and hundreds of millions of dollars short.

$40 Billion Settlement

Bank of America  has agreed to settle a class-action lawsuit brought by investors who claimed they were misled by its Countrywide unit into buying risky mortgage securities. Bank of America acquired Countrywide Financial, a California-based lender, in July 2008 for $2.5 billion, but analysts have put the effective cost at more than $40 billion, taking into account the post-purchase lawsuits, loan buybacks and write-downs.

According to attorneys for the plaintiffs, the settlement is to date the largest consensual resolution of a federal securities class-action case over mortgage-backed securities. Bank of America won court approval for a $315 million settlement of a similar lawsuit against its Merrill Lynch unit last May.

This settlement of Countrywide liabilities resolves three lawsuits and requires the approval of U.S. District Court Judge Mariana Pfaelzer in Los Angeles. The lawsuits were brought by the Maine State Retirement System and other pension funds who allege they were provided false or misleading information about the quality of the Countrywide loan pools they were investing in.

A Small Step On a Long Road to Recovery 

The announcement of the settlement was included in Bank of America’s quarterly earning statement  in which the nation’s second biggest bank reported higher net income for the first quarter, but missed analysts’ profit expectations.

Bank of America said the settlement resolves claims on about 80 percent of the unpaid principal balance of Countrywide-issued residential mortgage-backed securities, and 70 percent of similar claims against the bank overall.

This latest settlement, if approved, will be yet another step in Bank of America’s long road to recovery from what most analysts agree was one of the worst deals in the history of the financial services industry. That said, Bank of America can take some comfort in the fact that, while it made it to the final two years in a row, it has yet to beat video game maker Electronic Arts for the title of “Worst Company In America” based on a poll of Consumerist readers.

Bank of America/Countrywide still faces daunting challenges of various types, including trying to overcome substantial statute of limitations hurdles, should it now try to recoup its settlement payment costs by pursuing the loan originators from which it acquired many of the loans that ultimately were securitized.

Shocking Statistics from Foreclosure Review

As widely reported recently, close to 1.2 million borrowers (about 30% of the more than 3.9 million households that faced foreclosure proceedings by the 11 leading financial institutions in 2009 and 2010), had to battle purported wrongful seizures of these properties.

These battles were frequently waged despite the borrowers not having defaulted on their loans, being protected against foreclosure under federal law, or having been in good-standing under bank-approved plans to either restructure their mortgage loans or temporarily delay required payments.

More than 244,000 of those borrowers eventually lost their homes. Nearly 700 borrowers who faced foreclosure proceedings had never defaulted on their loans. More than 28,000 were protected under bankruptcy laws, while approximately 1,100 had been meeting the obligations under loan modification plans.

Perhaps most disturbingly, some 1,600 borrowers that were serving this notion and were protected by the Service Members Civil Relief Act of 2003, appear to have lost their homes at the hands of their mortgage loan servicers. A full breakdown of the statistics is attached here.

Yet, despite being enmeshed in multiple government and private litigation matters and governmental investigations for their alleged servicing, mortgage origination and secondary market misconduct, these same financial institutions brazenly continue to seek relief against correspondents and originators. We hope that over time we have helped originators realize that they should question the veracity of every single aspect of these financial institutions’ repurchase and indemnity claims; and for multiple reasons, originators might want to thoroughly investigate the banks’ servicing activities.

Aggregator/GSE’s do not Appear to be in a Hurry

From what we observe, originators are increasingly first being contacted by an aggregator or a GSE several years after the borrower’s alleged default, and often years after the underlying real property has been foreclosed on and/ or the loan has been modified. Yet, when originators request documentation regarding the servicing of the loan, many aggregators still refuse, claiming that servicing is not relevant or referring to “legal restrictions”. Are these aggregators correct? An originator won’t find out without doing some investigation on its own, as well as pushing this point with the aggregators.

Fannie’s Star Program reveals big banks failed to meet minimum mortgage servicer performance requirements

According to a report released Tuesday by Fannie Mae, the big banks who love to act like “injured innocents” when it comes to making mortgage repurchase and indemnification demands on loan originators had their own substantial problems servicing the loans that they either originated or acquired from third parties.

Bank of America, Citigroup and JPMorgan Chase all flunked Fannie Mae’s test of mortgage servicers, failing to meet even the minimum requirements for performance in 2012. Wells Fargo and Ally Bank both received the equivalent of a “C” grade, signifying an average level of performance relative to their peers.

The poor performance of the top banks is surprising considering the top five mortgage servicers—B of A, JPMorgan Chase, Citi, Wells Fargo and Ally—each claimed in October that they had met 304 different servicing standards and reforms as part of the $25 billion national settlement with 49 state attorneys general and federal regulators. That settlement was designed to address servicing abuses that led to the robo-signing of foreclosure documents.

Fannie’s “Star” program, now in its second year, was designed to create standards and rank servicers based on their overall performance, customer service and foreclosure prevention efforts.

A call for further action

Leslie Peeler, Fannie’s senior vice president of national servicing, said the Star program was designed “to recognize top performers, not to call out,” poorer ones. Nevertheless, if servicers are rated in the lowest quartile, that “indicates unacceptable performance and Fannie may take action, including implementing improvement plans,” Peeler says.

Bear in mind that the big “aggregator” banks typically make loan repurchase or indemnification demands because of alleged losses suffered related to those loans. In a startling number of instances, they are notably reticent to share information about how those losses (if any indeed were suffered at all) came about. Servicing errors could, of course, be one means by which a loss could be sustained.

Yet another reason to tread exceedingly cautiously, and to demand necessary information, before acquiescing to a buyback or indemnification demand.

Any follower of this blog or the mortgage crisis at large will — sadly — not be surprised by the seemingly never-ending news of foreclosure misdeeds by the nation’s biggest banks. Recent news reveals a particularly distasteful episode in the robo-signing foreclosure debacle involving victims who are among those who sacrifice the most for our nation and at the same time are among those most vulnerable to wrongful foreclosure tactics: our nation’s active-duty military.

While it has long been known that those affected by the robo-signing foreclosure issues included military families, that number has long been believed to have been relatively small. As the NYTimes’ DealBook reports, at least 700 military members are victims of wrongful foreclosures, in many cases while away from their homes and families on active duty. Not surprisingly given their ‘too big to fail” thought process, the banks’ defenses in this instance include the fact that those 700 or more foreclosures are just a small fraction of foreclosures under post robo-signing review.

Against this background, including the widespread criticism of the February 2012 “Robosigning Mortgage Settlement” among the big banks, States’ Attorneys General, and the U.S. Attorney General, the Office of the Comptroller of the Currency (“OCC”), recently announced a multi-billion dollar settlement with some of those very same banks. Under this latest settlement, the big banks have agreed to make available some $9.3 billion in payments and other relief to victims of the robo-signing foreclosure scandal.

This settlement arose out of investigations conducted by the OCC in late 2010 of multiple banks’ foreclosure practices. By early 2011, those investigations had resulted in OCC enforcement actions and consent orders between the OCC and the big banks providing for a review of the loans by allegedly independent third parties that came to be known as the Independent Foreclosure Review or Independent Loan Review.

A deeply flawed review process

As many have reported at length, this supposed Independent Loan Review was deeply flawed, rife with irreparable conflicts of interest - not surprising considering that the third parties performing the review were hired, paid, and supervised by the same banks whose misdeeds they were supposed to uncover. Nearly two years and $1.5 billion in loan review expenses later, all the review produced were results that were unreliable at best and at worst a mockery of the victims it was supposed to help.

But rather than the OCC doing what we would think a government regulatory agency is supposed to do - namely regulate by investigating, analyzing, and publicly reporting on the shortfalls of the Independent Loan Review and making all possible efforts to reform it – the OCC, seems to have taken the easy way out by nevertheless settling with the alleged wrongdoers.

It also seems to us that if, and to the extent, that the OCC entered into this settlement without having reliable data to reasonably determine the damages that may have occurred, it represents a failure by the OCC of such staggering proportion that it smacks of abject incompetency at best and at worst a complete abrogation of the OCC’s duty to the American public (i.e., to regulate the banks).

To add insult to injury, the OCC has stated that the settlement was entered into in with the goal of getting more money much faster into the hands of those damaged by the banks’ illegal foreclosure practices. But one might wonder whether the OCC honestly believes that to be true. No date for payments to victims has been set by the settlement.

And, it is the banks and other servicers that will determine the respective amounts to be paid to the borrowers (subject to review by the OCC). But without sufficient data,  it is inconceivable as to how the OCC will be able to determine what payout amount each wronged borrower should receive. While the OCC would certainly never admit to this, it seems as though its laudable goal of years past to determine payouts based on the degree of harm is being replaced with nothing more than an arbitrary lottery.

How anyone, most of all the OCC itself, can still take the OCC’s motto (“Ensuring a Safe and Sound Federal Bank System for ALL (emphasis added) Americans”) seriously after this latest apparent debacle is a mystery.

President Barack Obama delivers the State of the Union address at the U.S. Capitol in Washington, D.C., Feb. 12, 2013. (Official White House Photo by Chuck Kennedy)

In his State of the Union Address on February 12, 2013, President Obama called on Congress to make it easier for families to refinance their mortgages. Specifically, the President urged Congress to pass refinancing legislation being sponsored by Sen. Robert Menendez (D., N.J.) and Sen. Barbara Boxer (D., Calif.) that would waive certain fees that the Federal Housing Finance Agency (“FHFA”) had reduced but not eliminated entirely for Home Affordable Refinance Program (“HARP”) borrowers making payments on mortgages held by Fannie Mae and Freddie Mac.

Also, while the bill, “The Responsible Homeowner Refinancing Act of 2013” would not create a new refinancing program, it would reduce certain demands placed on lenders that refinance loans they don’t currently manage, including eliminating employment and income verification requirements to refinance, and extend the HARP program for one more year, to the end of 2014.

Significantly, the bill applies only to borrowers with loans held by Fannie Mae and Freddie Mac, not to borrowers with private loans. Nonetheless, the legislation appears to enjoy broad industry and consumer support, including from the National Association of Realtors, the Mortgage Bankers Association, the National Association of Home Builders, the Center for Responsible Lending, and the Consumer Federation of America.

Despite historic low mortgage rates, hopeful homeowners are still being rejected

President Obama argued in his address to the nation that the bill was needed because, “even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected. Too many families who have never missed a payment and want to refinance are being told no.” The average interest rate for a 30-year fixed-rate mortgage hit 3.31% in November 2012, the lowest rate on records going back to 1971 and has remained near historic lows for months. It was at 3.53% in the week ending February 14.

By the Obama Administration’s calculations, the average homeowner could save $3,000 a year by refinancing at today’s low rates. An analysis by the Congressional Budget Office released in September 2011 put the savings at closer to $2,600 per borrower, with first-year gross cash savings from reduced mortgage payments of approximately $7.4 billion.

This is similar to the conclusion reached by Mark Zandi, chief economist at Moody’s Analytics (and a former advisor to 2008 Republican Presidential nominee John McCain,) who estimated that the proposed legislation would result in 2.9 million more refinancings for Fannie/Freddie borrowers, which would help borrowers save a combined $7.3 billion annually in mortgage payments. The analyses by both the CBO and Zandi were referenced in a September 2012 analysis done by the Congressional Research Service.

Future Implications

Whether the bill will become law remains unclear. The legislation was initially proposed last year but stalled in Congress. With its reintroduction this year by Sens. Menendez and Boxer, the bill will likely come up for a Senate vote later this spring, but it is less certain what will happen if it goes to the Republican-controlled House of Representatives.

For the time-being, the uncertainty in Washington, D.C. surrounding various budget-related issues will likely keep mortgage rates low, even if many homeowners remain unable to take advantage of them. This is because U.S. Treasury and mortgage bonds are generally perceived as the safest investment around when investors are anxious about the economy.

As noted in the DOJ’s press release, the lawsuit alleged that investors, many of them financially insured institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true risk.

The Complaint also alleges that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s relationships with investments banks, when actually, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.

The Complaint: Exhaustive and Methodical Inquiry

The Complaint is over 100 pages, and goes into great detail as to the greed and brazenness of S&P in its attempt to manipulate the market and bolster the ratings of products it knew were not worthy of the favorable ratings it was giving. It alleges that S&P knew that its investment ratings were critically important, and that many financial institutions relied on them to assess the worthiness of their investments.

Those investments were made in extraordinary volumes: from September 2004 through October 2007, S&P issued credit ratings on over $2.8 trillion worth of RMBS and nearly $1.2 trillion worth of CDOs. The Complaint asserts that S&P knew its fees for making the ratings, ranging from $150,000 to $750,000, were passed on to the investors who purchased CDO tranches. Thus, it allegedly had incentive to help generate wide pools of investors so that S&P’s fees could be paid. Unsurprisingly, McGraw Hill’s annual reports reflected significant profits in these years.

Alleged Scheme

S&P’s scheme to defraud, as alleged in the Complaint, was tied to its repeated representation that its ratings were objective and uninfluenced by any conflict of interest, when in actuality, there was a significant conflict, as S&P well understood. The Complaint exhaustively lists many policies of S&P that were in place to ensure that it was conflict free. Likewise, the Complaint catalogues the many public representations it made asserting that it was.

Nevertheless, the DOJ contends that S&P’s “desire for increased revenue and market share in the RMBS and CDO ratings markets, and its resulting desire to maintain and enhance its relationship with issues that drove its rating business improperly influenced S&P to downplay and disregard the true extent of the credit risks posed by RMBS and CDO tranches in order to favor issuers in its rating of those tranches.”

The DOJ has put together, through this pleading, what is clearly an exhaustive and methodical inquiry into S&P’s practices.

We look forward to seeing the underlying support for its allegations, and are interested to see how aggressive S&P will be in defending itself against these detailed and specific allegations.

The letter was sent to the presiding judge. In that letter, the investors claim that Bank of America may have engaged in self-dealing and other misconduct in connection with modifications to first lien loans held by the trusts where Bank of America or Countrywide held second lien loans on the same mortgaged properties.

Claims of Self-Dealing and Misconduct

The investors further claim that Bank of America’s self-dealing and other misconduct continued to occur during the course of the settlement negotiations. In addition, the investors state that Bank of America avoided repurchasing from the investors in excess of $30 billion in loans. Under the pooling and servicing agreements, either Bank of America or Countrywide are claimed to have had an obligation to repurchase modified mortgage loans.

In three sample loan modifications included with the letter, the investors claim that either Bank of America or Countrywide, as servicer of certain first lien loans, would slash the outstanding principal balance of the loans and book a loss to the trusts while the holder of the second lien loans, Bank of America or Countrywide, would make monetary gains on their loans. In each of these instances, the investors maintain that a short sale or foreclosure would have been a more effective strategy than a large loan writedown.

Writing Down Debt

Prior to the modifications, the investors claim that the collateral value to the second lien loans had been purportedly eroded. However, by writing down debt, Bank of America or Countrywide as owners of the second lien loans avoided taking a loss even though the banks should have taken a loss before the holder of the first mortgage. By modifying the first lien loans they serviced, the banks were apparently increasing their chances of getting full repayment on their loans.

So what’s next? The investors called on the trustee to investigate these claims. We’ll have to keep a watchful eye to see how this all unfolds.