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BofA/BONY Versus AIG – No Winners
It would appear that an important court case may go in favor of BofA
and Bank of NY in a suit brought by AIG’s wholly owned subsidiary
United Guaranty Mortgage Indemnity Co. If that is the final outcome it
will set a dangerous precedent for the Mortgage Insurance industry. It
could destroy what is left of an already broken part of the mortgage
market.
This fight is headed for a conclusion in the next few
weeks. I think the MI industry has been a significant part of the
collapse of the mortgage market, housing market and therefore the US
economy. But, in this case I have to side with the MI industry. I have
some insight on this that is apparently not in the court’s hands at
this time. If and when this information becomes public it could change
the outcome of this important case. Some background:
In March of
2009 United Guaranty (UG) sued Countrywide Financial (“CWF”) (BofA now
owns CWF). The lawsuit accused CWF of misrepresenting underwriting
standards on loans UG insured. Specifically, UG claimed that most
mortgages covered by policies for asset-backed securities were either
underwritten in violation of Countrywide’s own guidelines or contained
defects, such as missing documents, misrepresented credit scores or
false social security numbers. The mortgages in question were bundled
into junk MBS. The Agent for these securities was Bank of NY. Investors
who lost money are suing BONY/CWF-BofA. UG insured the mortgages and is
now trying to walk on that promise.
A US District Court issued a ruling
on 10/5/09 in favor CWF. While there is still some wiggle room it looks
like UG is going to have to pay. If that is the case it will set a
dangerous precedent.
Historically MI companies have paid
claims in situations where there has been fraud committed by the
borrower. However they do not pay claims where a loan officer,
appraiser or real estate agent has committed the fraud. The critical
issue is therefore who committed the fraud. If it is the borrower, then
UG and the other MI companies are forced to pay. If the fraud is
perpetrated by the lender (or their agents) UG can walk on its
obligations.
The question that needs to be examined is how many
of the defaulted mortgages in question were the result of fraud by the
borrower or fraud by the lender. In this regard consider an (as of now)
unrelated matter in Illinois. This concerns a Countrywide office in
Chicago. That office, under a program called Optimum, originated
approximately 1,000 loans. Substantial percentages of these loans have
gone into default. An investigation has determined that 90% of the
busted loans had the following ‘coincidences’:
-The same loan officer.
-Same RE agent.
-Same appraiser.
All of the loans had credit references from the same sources:
-A boot company.
-A linen shop.
-A restaurant.
The FBI is involved with this case. I will leave it to the reader to conclude if lender fraud was involved or not.
If
the Court’s decision in California stands, the MI companies losses will
explode. Their ability to survive this is already in doubt.
Approximately 20% of the mortgages held by Fannie Mae and Freddie Mac
are insured by the MI industry. Therefore the taxpayer will suffer the
losses. If the California court reverses it’s decision (unlikely) then
BofA and Bank of NY stand to lose. In this outcome the taxpayers will
also suffer.
The President has proposed regulations that would
protect consumers from predatory lending tactics. That is sorely
needed. What is needed even more are some regulations that protect the
taxpayers from footing the bill for everything that goes wrong. There
is plenty of evidence that fraud has been committed by all involved.
The lenders, the borrowers and Wall Street are all dirty. But it is our
grandchildren that will get stuck with this bill.
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Thanks again to ACORN (and all associated) for all the protests forcing loans to "poor" people in inner cities.
This decision by no means represents a final loss for United Guaranty on the merits -- rather, it was a motion to dismiss under which United Guaranty's tort and statutory-based claims were knocked out by BAC/BNY. The breach of contract and bad faith claims survived the first motion to dismiss and were not at issue in this motion. In other words, the case will proceed against BAC/BNY on the contract-based claims.
While ordinarily very good -- ZH, please do a better job of confirming (readily ascertainable) facts before making sweeping generalizations based on those (in retrospect, erroneous) facts.
What's the point of reps & warranties if BAC/Countrywide can get away with fraudulently originated loans? This is a situation where a pre-existing condition warrants the cancellation of insurance.
Tony Soprano couldn't be more proud to see his sons of debauchery at the helm of BofA/BONY. Arise, follow your conductor and fear no danger.
BTW, just because the FBI is involved doesn't mean there was first party fraud. Banks regularly send suspicions of third party fraud to the FBI.
"The President has proposed regulations that would protect consumers from predatory lending tactics. That is sorely needed."
What is sorely needed is to force lenders to retain some credit risk.
Imagine the mortgage industry if lenders had to retain credit risk on over-80LTV mortgages; they could not rely on MIs to throw the risk on?
I would bet we wouldn't see nearly as much trouble.
Agreed, mortgage lenders need to have skin in the game. It really doesn't have to be any dumber than that to fix the problem
I do "true audits" of loan documents and not the TILA/RESPA garbage. Everyday, I see evidence of the fraud on the part of the lender and the broker.
The underwriting sections in the Pooling and Servicing Agreements were so loosely written that anyone could qualify for a loan. CW knew that they would sell the loan, so it did not matter to them.
There are "plans" in the works with attorneys that I deal with which will hopefully have a major effect on the fraud. Keep a watch about three months from now.
Pat
www.loanfraudinvestigations.com
please keep us informed.
No wonder the banksters prefer to pick up their free government money and play in the trading sandbox. Real estate lending has become the ex-wife you never want to see again !!
Great article, Bruce. The MI situation is put clearly in perspective. Seems like the taxpayer gets gangbanged from every direction.
Great article Bruce. I worked in banking for many years but interestingly was in the title biz from 2000-2008, which gave me a very unique perspective.
the actions of the lenders and their agents is horrifying. I saw it all and just shook my head knowing that it would all end badly. it has as we now know.
i knew it reached desperation when some lenders (well known I might add) were approving mortgages with 475 FICO scores...that is NOT a typo: 475.
taxpayer gets stuck with the bill, we know that.
did I mention for the umpteenth time that FHA will implode? I do think they can get it past mid terms though.
Bruce,
Nice article.Again.
Ok, here is the deal, yes, mortgage insurers are right to file a suit alleging fraud on the lending institutions at BAC (namely CFC).
So CFC commits fraud on probably tens of 1,000's of loans if not more. Knowing the borrower would at some point default, and knowing the borrower would have to pay the mortgage insurance in the event of default, why worry. Risk of borrower's default upon loan originators such as CFC has been decomposed through the mortgage insurance loophole right? So why should loan originators such as CFC worry?
This is not unlike the monoline insurers at the end of 2007 and beginning of 2008. To tell the truth, yes, CFC is guilty as the day is long of fraud,and no, the mortgage insurer' should not have to pick up that liability, theoretically.
However, it could be that insurance is not such a good thing after all. Maybe, the judge is thinking, let the mortgage insurers swim with the fishes, make them pay the claims and put every last one of them out of business. Why the hell not? Serves mortgage insurer's right for violating the first rule of business "know your client." In the case of mortgage insurers, they all knew the type of corporate culture there was at mortgage lenders like CFC and New Century (why do you supppose Ken Lewis probably loved these churn and burners schmucks at CFC so much).
The judge is probably thinking the world will be better off with a few less mortgage insurers. Hobble the mortgage insurance industry that was riddled with moral hazard so that only the good mortgage insurers whose code of ethics stayed within the guidelines of "best practices." Those mortgage insurers that did not do business with criminals will pick up market share. If mortgage insurers hazard to consort with cockroaches, let their financial souls burn in some layer of Dante's hell.
Yes the industry will shrink. Yes, less people will be able to borrow and get into a home. But also, the industry will be a lot cleaner. the Countrywide lenders of the world won't be able to execute their scams and fraud, and loan originations will not be a business so damn attractive to criminals that get paid high fees doing high volume levels of fraudulent activity. So the criminals will flee the high fee origination business like the cockroaches they are "when truth in lending" actually means "truth in lending" once again.
There is another reason that the MI industry should be forced to shrink. Financial innovation has come to rely way too heavily on insurance products to lay off and decompose risk. Financial innovation should be made much tougher to do in the future. Financial innovators should not be so easily able to hedge and layoff the risks they take onto others. They need to know what it is like to have some skin in the game.
If everyone had some skin in the game from zero% down borrowers, to loan originators, to mortgage insurers, the goddam world would be a whole lot better off.
It is just the sort of good cleansing needed not just for the mortgage insurance industry, but for loan originators too.
Deadhead , Its my opinion that CRA was about getting the underground economy (cash only) people hooked. How many illegals and nodocs did you see ?
i didn't see as many illegals, but most of my residential work came from east coast....i think we know the situation on the west coast.
lots of nodocs. even on the documented loans, incomes were, shall we say, adjusted. this has been happening for years and will always happen when the underwriter is commissioned or paid for production. it's the ultimate fox watching the chickens.
i knew it was over when major players started giving out mortgages for people with sub 500 FICO...I cannot begin to explain how bad that credit rating is.
I was in banking (fortune 500 bank, big regional) at the time of CRA...though it may have assisted the underground community, the objective and purpose was simply to get low income earners into homes. pure and simple as that from where I sit, i.e. kind of a typical lib affirmative action lending matter. that situation is not what snowballed the mortgage mess in my view. the matter got out of hand when non FDIC insured lenders got in the game and the rmbs, cdo, etc business took off.
as critical as I am of the fdic, they and the OCC were still pretty tough on banks lending out insured funds in an irresponsible manner. the problem was the shadow banking system and yes, the fdic insured banks were involved but through subs that did not have access to fdic insured deposits.
regards to that 'tough' descriptor, what might your take be on those regulatory views on commercial / construction lending? I hold the opinion that regulatory bodies (fdic, occ, ots, ncua) were perpetually late in their memorandums & opinion pieces in regards to lending standards.
I echo those comments about the shadow banking/SIV/securitization systemic risk 'distribution' process. The best method to fund those risky loans is to risk nothing long-term.
Seems to be another example of a failure to preform due diligence by the MI and should therefore be a decision of % responsibility with the MI having to bear half the responsibility for being more eager to collect the check than facts.
The MI company should be on the hook for the whole amount.
Ask yourself this - if the MI company didn't think there was some possibility of, let's call it "flexibility" in the borrower's stated income, why then do they charge more for it?
The MIs knew full well what they were getting into, and thought they had priced for it accordingly. Now that they realize they messed up, they are turning to the courts for relief.
As someone who worked in the mortgage industry I can say that it was pretty rare for the MI companies to underwrite the loans themselves. There is a huge degree of trust that the lender is writing legit loans to their published guidelines and perform due diligence. That is how a loan is insured. The only fallout for them should be solely on the borrower not being able to pay due to hardship- not a loan set up to fail from the start by fraud or an exception to the published guidelines.
Bunk. Every MI company did periodic Quality Assurance audits, I was dragged into some myself. It was well within their rights under their master policies to re-underwrite each and every loan.
But yet they failed to do so, because they loved the premiums when house prices were going up 10% a year, but didn't want to undergo the expense of proper underwriting. now that they are losing money on these deals, they are crying "fraud".
Their latest scam is to claim every loan underwritten in 2007 had appraisal fraud. I'll bet every person who bought a house in 2007 wishes they could claim that, and force the bank to buy back the house at 2007 levels.
The MI industry is useless, and needs to be abolished. We need to force lenders to retain risk on high LTV loans, or don't do them.
fanciful is me waking up this mourning and hearing Larry summers on the radio saying, "Were out of the woods". I think the word you need is ... freaking hair raising scary
This is totally incredible ... BAC vs. AIG. We taxpayers get the shaft either way ... and to boot we have to fund the FBI for looking into it, the judges for adjudicating it, and two sets of $2,000 / hour lawyers for representing each side.
Also, if BAC loses, a million more case come down the pike, multiplying our loss by a million.
If AIG loses, the Mortgage Industry goes under and BAC and banksters tighten grip on mortgage issuance.
I think this is the tip of a litigation iceberg ... bank A suing bank B; bank B counter suing bank A ... we foot entire bill for next five years.
Twilight Zone would reject this story as too fanciful!
I have not totally read on this article, but since we are discussing who is paying for it, think we taxpayers are being given a raw unapproved deal.
As far as the mortgage industry going under, not exactly, just being supported by thiefs who really don't care who ends up with the last batch of worthless loans.
Since this story, and many of the articles in here relate to the articles we post on www.inbailoutswebust.com.
Please visit the site and comment on ours, appreciate the feedback.
RC