Is Fraudclosure About To Claim Its First Victim: First Horizon Plunges After Subpoena Disclosed As FHFA Announces No Reserve Established

Tyler Durden's picture

Investors in FHN are not very happy after it was just announced that the the bank has been subpoenaed by the FHFA, conservator for the GSE, in connection to ongoing probe; and further allegations that it may be unable to determine probable loss, and that no reserve was established. Oops. And here we were thinking that the recent subpoenas disclosed as launched by the FHFA (which also target JPM among others, and obviously First Horizon) would result in absolutely nothing. Luckily, the SEC last week reminded all banks that keeping track of mortgage repurchases and foreclosure reviews may be a good idea after all. Looks like just as "Waddell and Reed" was the SEC sacrificial lamb in regards to HFT, so FHN may be tasked with the same function vis-a-vis fraudclosure... Unless we actually see comparable actions taken against the real villains in this case: BofA, Wells, JPM and Citi.

From the just released 10-Q:

FHN has been subpoenaed by the conservator for two GSE investors in six securitizations in connection with an ongoing investigation which may or may not result in claims based on representations and warranties. Since the investigation is neither a repurchase claim nor litigation, the associated loans are not considered part of the repurchase pipeline and FHN is unable to estimate any liability for this matter. At the time this report is filed, FHN was a defendant in lawsuits by three investors in securitizations which claim that the offering documents under which certificates were sold to them were materially deficient. Although these suits are in very early stages, FHN intends to defend itself vigorously. These lawsuit matters have been analyzed and treated as litigation matters under applicable accounting standards. At September 30, 2010 and at the time this report was filed, FHN was unable to determine a probable loss or estimate a range of loss due to the uncertainty related to these matters and no reserve had been established. Similar claims may be pursued by other investors.

Oh they will be. And some more on what may soon be coming to most other banks as well:

Unlike loans sold to GSEs, contractual representations and warranties for proprietary securitizations do not include general representations regarding the absence of fraud or negligence in the underwriting or origination of the mortgage loans. Securitization documents typically provide the investors with a right to request that the trustee investigate and initiate repurchase if FHN breached certain representations and warranties made at the time the securitization closed. Investors generally are required to coordinate with other investors comprising not less than 25 percent of the voting rights in certificates issued by the trust to pursue claims for breach of representations and warranties through the trustee under the applicable trust agreement, and generally are required to indemnify the trustee for it’s costs related to repurchase actions taken. GSEs were among the purchasers of certificates in securitizations. As such they are covered by the same representations and warranties as other investors. However, GSEs acting through their conservator, under federal law are permitted to pursue such claims independently of the other investors.

Also unlike loans sold to GSEs, interests in securitized loans were sold as securities under prospectuses or other disclosure documents subject to the disclosure requirements of applicable federal and state securities laws. As an alternative to pursuing a claim for breach of representations and warranties through the trustee as mentioned above, investors could pursue a claim alleging that the prospectus or other offering documents were deficient by containing materially false or misleading information or by omitting material information. Claims for such disclosure deficiencies typically could be brought under applicable federal or state securities statutes, and the statutory remedies typically could include rescission of the investment or monetary damages measured in relation to the original investment made. If a plaintiff properly made and proved its allegations, the plaintiff might attempt to claim that damages could include loss of market value on the investment even if there were little or no credit loss in the underlying loans. Claims based on alleged disclosure deficiencies also could be brought as traditional fraud or negligence claims with a wider scope of damages possible. Each investor could bring such a claim individually, without acting through the trustee to pursue a claim for breach of representations and warranties, and investors could attempt joint claims or attempt to pursue claims on a class-action basis. Claims of this sort are likely to be resolved in a litigation context in most cases, unlike most of the GSE repurchase requests. The analysis of loss content and establishment of appropriate reserves in those cases would follow principles and practices associated with litigation matters, including an analysis of available procedural and substantive defenses in each particular case and an estimation of the probability of ultimate loss, if any. FHN expects most litigation claims to take much longer to resolve than repurchase requests typically have taken.

At September 30, 2010, the repurchase request pipeline contained no repurchase requests related to securitized loans based on claims related to breaches of representations and warranties. FHN has been subpoenaed by the FHFA, Conservator for Fannie Mae and Freddie Mac, related to investments made by the two GSEs in six proprietary securitizations issued in 2005 and early 2006 in connection with an ongoing investigation which may or may not result in claims based on representations and warranties. The original and current (as of September 30, 2010) combined certificate balances related to Fannie Mae investments were $443.2 million and $194.0 million, respectively. The original and current (as of September 30, 2010) combined certificate balances related to Freddie Mac investments were $842.0 million and $402.1 million, respectively. Since the investigation is neither a repurchase claim nor litigation, the associated loans are not considered part of the repurchase pipeline and FHN is unable to estimate any liability for this matter.

At the time this report is filed, FHN was a defendant in lawsuits by three investors in securitizations which claim that the offering documents under which certificates were sold to them were materially deficient. Although these suits are in very early stages, FHN intends to defend itself vigorously. These lawsuit matters have been analyzed and treated as litigation matters under applicable accounting standards. As of September 30, 2010 and at the time this report was filed, FHN is unable to determine a probable loss or estimate a range of loss due to the uncertainty related to these matters and, accordingly, no reserve had been established. Similar claims may be pursued by other investors.

At September 30, 2010, FHN had not reserved for exposure for repurchase of loans arising from claims that FHN breached its representations and warranties made at closing, nor for exposure for investment rescission or damages arising from claims by investors that the offering documents under which the loans were securitized were materially deficient.

You read that right: complete lack of preparedness for putbacks. Oops.

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bugs_'s picture

shredding party tonight!!

 

Comrade de Chaos's picture

tonight might be too late...

wonder how many executives of.. were trick or shreding the other night.

 

cdskiller's picture

Let's do it at my place! I've got a 52 inch plasma. We'll watch some Monday Night Football, snort some coke, squirt shredder lube all over the hookers, it'll be great!

Bigger Dickus's picture

Next to go: Wells Fargo.

Fuck you Warren "Mr Magoo" Buffet and the horse you rode in on.

 

johngaltfla's picture

HSBC isn't exactly sitting pretty either. Then again, if you could see the empty buildings down here that I lovingly call "RF's AAA Portfolio" it woudl blow your mind.

Wilmington Trust though was the first to duck and cover....

johngaltfla's picture

Florida: From north of Tampa to Marco Island (Naples).....the banks are still holding them at 100% of original valuations on the books. Houses though are being liquidated at 55-75% off original first lien issuance.

aerojet's picture

God damn, I hope so! Those fuckers have been lying that their shit don't stink for too long.

Cognitive Dissonance's picture

Very interesting that I've been asking First Horizon to "Show me the Note" for the last 6 weeks without any substantial reply.

Where's the beef?

http://www.youtube.com/watch?v=Ug75diEyiA0

"Hey, where's the beef? I don't think there's anybody back there."

centerline's picture

CD, my mortgage was bought by FHN and sold off a few years later to another company.  Guessing my paperwork is in the same black hole (or a neighboring black hole).  Please keep us posted of anything new on your "show me the note" story.  Thanks.

Cognitive Dissonance's picture

It appears that the FHFA might get some answers faster that I'll be able to. So much the better........I hope. 

Unfortunately I still think that, once the elections are behind us and the markets are deliberately tanked to create panic and the political need to "do something", the lame ducks will roll out a political solution.

I don't want this to happen, but it fits the Modus Operandi of the Ponzi. 

http://en.wikipedia.org/wiki/Modus_operandi

centerline's picture

Wouldn't be surprised.  Unfortunately.

Mr Lennon Hendrix's picture

Some desperate act will be measured.

Rick64's picture

 You might have to give them some more time, I think they are going to be really busy for a while.

Cognitive Dissonance's picture

I've begun to deposit the mortgage payment funds, beginning with the one due Friday, in an escrow account along with an extra 15% for various "fees" they will insist on collecting. I consider the 15% my "entertainment" expenses.

I'm willing to go to the wire on this one.

Rick64's picture

 Best of luck to you, but I side with you on your above post that after the elections it will be resolved in a pro-establishment resolution.

aerojet's picture

Exactly.  Economics means you get screwed.

MachoMan's picture

Did you arrive at this decision through legal advice?  Are you planning on selling your home/in the process of selling?  Have you combed through (spaceballs) your note and mortgage documents for your rights regarding determining the holder of your note/mortgage?  Do you have a state statutory scheme that will award you damages for when your bank does this?  Do you think that you are not being provided credit for your principal payments or are otherwise being defrauded by a person/entity pretending to be the servicer of your note/mortgage?  Just curious at how you arrived to go that route.

Cognitive Dissonance's picture

 Just curious at how you arrived to go that route.

I flipped my highest quality Gold Eagle in a best 5 out of 9 series a la the SCOTUS. Heads I won, tails they lost. Obviously I won and based upon my "research" I decided to go to the mattresses. :>)

In fact I spent serious coin seeking legal counsel. After much discussion and research, I made the decision. It doesn't get really serious for a few months so I can always chicken out. :>)

 Do you think that you are not being provided credit for your principal payments or are otherwise being defrauded by a person/entity pretending to be the servicer of your note/mortgage?

Actually I do. I've been having problems getting proper mortgage interest paid tax documents since the first time the mortgage was sold. It got so bad that last year I was audited because the IRS was receiving conflicting info from multiple mortgage companies. So obviously the IRS decided I was defrauding them because mortgage companies never ever make any mistakes or perpetuate fraud.

Both my attorney and I suspect my mortgage was sold multiple times to multiple parties at the same time.

MachoMan's picture

Sounds like that in and of itself is enough of a justiciable issue to not get you thrown out on your face...  my big issue for so many people wanting to know where their notes are, where are your damages?  Harassment/defamation/etc. from the IRS is enough to get a judge or jury to feel your pain...  practically speaking, that's probably all you need.

Best of luck.  Always interested to hear stories from the trenches.  I'm about to get fed up too...  although I doubt my employer will allow me to pursue the case, given the obvious considerations, against our city...  for being fuckwits on city employee retirement obligations...  (at best). 

Cognitive Dissonance's picture

 my big issue for so many people wanting to know where their notes are, where are your damages?

See, this proves to me you really are an attorney. Because I talked to three attorneys (plus my attorney sister, so call it 4. I did not retain my sister in case you are wondering) and they all said the same thing. You must show damages or you will be dumped quick by an impatient judge. Yet this is the last thing the layman thinks about because we laymen just think about justice for the good guys. We don't understand that it's always about damages.

 Harassment/defamation/etc. from the IRS is enough to get a judge or jury to feel your pain...  practically speaking, that's probably all you need.

And that has been documented very well be the IRS. BTW after the audit they owed me $1400 additional because I had been conservation in expense recognition and during the audit I pushed through some stuff I didn't originally take on the original 1040. That was last year and they still haven't sent me my money. My lawyer has that. They will now be paying the legal collection fees if at all possible.

MachoMan's picture

The good attorneys will tell you to your face you don't have a claim and will not take your money just to play with the train set for a while...  have to do this all day, every day.  I see so many attorneys (a helluva lot on the other side unfortunately) who just milk the shit out of clients in loser cases...  they don't have a damn prayer of winning except their clients don't know it...  they make a good enough appearance and all to thwart malpractice/other claims, but the end was pretty much certain from the start.  I prefer to weed out the stinkers on the front end.  Also, helps to have clients for many years (i'm a scrub, but my employer has been successful at this) because you know whether their recollections are correct or subject to crawfishing on the stand.

RockyRacoon's picture

You realize, of course, CD that a few of the folks in the ZH peanut gallery will now place you in the "dead beat" category.   I say, "Eff 'em!".   I had a second mtg with FHN that is now paid off.  It was a 15 year balloon and I paid them an extra $500 monthly often to pay it down and avoid a balloon.  It is paid off 7 years early.  I have yet to hear a peep from them and have gotten no satisfied wet note to file at my Court House.  My current mtg is a 1st with Wells Fargo and I have asked for the requisite documents on my loan.

We'll see!

Cognitive Dissonance's picture

You realize, of course, CD that a few of the folks in the ZH peanut gallery will now place you in the "dead beat" category. 

Alas, I've been called worse here. But even I can't hit the qualifications of "dead beat" since I'm placing the money in an escrow account that needs my signature, that of my attorney and the mortgage company to release the funds. Wish I could spend it on iPhones, iPads and 48" LCD TVs. :>)

 I have yet to hear a peep from them and have gotten no satisfied wet note to file at my Court House.

It's my understanding that Raccoon's like everything "wet", so maybe it's you RR and not your 2nd Mtg holder that's the problem. :>)

Fish Gone Bad's picture

I wouldn't use the name deadbeat, I am thinking clever.  This is actually following rule #3 - Plan ahead.

RockyRacoon's picture

The dead beat cognomen is applied by those holier-than-thou types who will trash you for any infraction.

Milestones's picture

COOL!!! Out here in the west--Put your nmoney where your mouth is!! The snowball is starting to roll. Five thumbs up Cog.    Milestones

Admiral Bolitho's picture

Pretty risky entertainment.   The common law usually sides with the lien-holder despite "technical" issues.  My bet is the banks will win in the courts on this one---equity will demand it!

Fish Gone Bad's picture

"Both my attorney and I suspect my mortgage was sold multiple times to multiple parties at the same time."

Using the escrow account shows good faith.  The bank can indeed win, but only one of them.

RobD's picture

My mortgage payments used to go to FH and now go to Metlife so my note may be doubly forked. LOL

Cognitive Dissonance's picture

My 5 year old original mortgage has been "sold" 4 times, only recently ending up in the lap of FH. So I'm pretty certain the beef has been lost. None of the "sales" my mortgage has experienced (and they were sales, not just change of servicers) were ever recorded in the county where I live. In fact, as far as the county is concerned, my mortgage is still where it started.

I had a conversation with the Clerk of the Court, who is responsible for recording the "sales", and she says the county is interested in "recovering" the lost fee income from all those non-recorded "sales". And mine is not the only "sale" they suspect hasn't been recorded. The county just allocated $250,000 for legal fees to "investigate".

Oh good, someone else wants to party with me. :>)

MachoMan's picture

It has been longstanding law here, and I suspect in virtually all states, that a defective mortgage (unrecorded, improper acknowledgment, etc.) may still be imposed upon the party signing it...  it just may not be recorded in its defective form and given priority among lienholders...

I've said it once, I'll say it again, the big issue in all of this, from a property law perspective (not securities), is priority of lienholders.  In the case of a transfer that does not pay the requisite transfer tax, then the subsequent purchasers will likely be divested of priority to those who properly paid their tax...  the only other possibility is to dump everything back on the original mortgagee and pretend nothing happened and hope you can rest on first priority (doubt a court buys this one). 

Regardless, J6P is still on the hook, the only question is who gets to take whatever they can out of his house/land.  My guess is that the seconds and thirds of the world are more valuable than presently thought...  but, of course, these are likely hopelessly underwater also, so it really doesn't matter.

Further, given the counties can't track down all the subsequent transferees (they have no idea) and this documentation will not be forthcoming, the counties are going to attempt to tax the present owners, if anyone, for the difference and let the present owners sue the banks/go through discovery to try and get the money back.  Taxing authorities throw out "sky hooks" as my boss likes to call them all the time...  It's then up to the taxpayer to come up with a defense.  (obviously the present owner is going to prevail unless all the transferees are turnips).

The biggest interest to me in all of this has always been the local taxation of the land aspect...  I still think that's the real death blow waiting...  especially considering the length of time it presently takes for delinquent properties to be certified to the state's land authority for auction...  if this process is sped up, the ~06-present vintage is going to be in a world of hurt here for sure.  No telling how many properties are in the pipeline/should be referred for auction.  Add stuff like the transfer taxes onto the bill, and it's going to be a large one...     

Cognitive Dissonance's picture

See my response above about the various mortgage companies not properly recording or apportioning my interest and principal payments. I suspect my mortgage has been sold to multiple parties at the same time.

chubbar's picture

I wonder if a properly recorded second mortgage, arms length but a round trip "loan" so to speak between friends, could result in a 1st position for foreclosure purposes? The 1st mortgagors only have themselves to blame for not properly recording the transfer. It'd be an interesting loophole to investigate. Let them argue who has first postion on the foreclosure. A friend who "loaned" you the funds may just let you live there rent free should a foreclosure occur (hint hint). Just make sure the loan amount is close to what the present market value of the house is and let the chips fall where they may.

MachoMan's picture

Depends on whether you live in a deficiency state...  that deficiency judgment after the sale (to you) would be a bitch...  and would click off at a significantly higher rate than present mortgage rates...  Further, just to be sure, you'd need a third buddy waiting in the wind to purchase at foreclosure sale...  he should hold it for at least a year, and then dump it back on you.  Now, whether or not the whole process was fraudulent/intended to circumvent yada or this or that is anyone's guess...  the good part is that sympathies are on your side.

This risk is precisely why you had foreclosure moratoria...  to protect the firsts in the meantime...  I've said it once, and I'll say it again, I pray to christ these idiots fraudulently foreclose on my house every day...  I want it for free and to get made for the rest of my life...  please, by all means, do it.  If I was a second or third right now, I'd be ramping up my foreclosures if I knew my shit was in order...  ready to take out the first and/or reach a solid settlement while everyone knew their pants were down.

But yes, completely and totally all the banks' dumbass fault...  why the hell they did this I have no idea, but it's hard to believe the pervasive stupidity is not somehow designed... 

Cognitive Dissonance's picture

why the hell they did this I have no idea, but it's hard to believe the pervasive stupidity is not somehow designed... 

Bingo. I have my theories, but I want to do more research before I open myself up to 100 junks. Maybe some day soon.

jeff montanye's picture

do i ever look forward to that post.  thanks to you and all who bring expertise here.

SheepDog-One's picture

Banks all droppin like flies on election eve...aw thats a shame.

system failure's picture

Inflate the problem away Benny, try and inflate your problems away you complete failure and ruiness disaster for modern civilation.....

Oquities's picture

this next song goes out to my sugar daddy ben.  it's inspired by The Mamas and the Papas' California Dreamin'.  fire up the karaoke and see if it fits.

 

                  Quantative Easin'

 

All my stocks are up in my 401(k)

And my random walk, is still lookin' okay

I'm even safe with AMBAC muni bonds from L.A.

Quantative easin', takes my risk away.

 

Stopped into my bank, to pay my loan today

Well the banker takes my fiat, and we pretend I pay

You know that leech he wants my gold, but it's all squirrelled away

Quantative easin', boosts my silver play

 

My real estate is down, and my mood is gray

So I will just default - it's that easy they say

I'll give the house keys back, eighteen months from today

Quantative easin', makes my rent free today

 

Quantative easin', where politicians play

Quantative easin', is surely here to stay

 

 

thank ya ver much

Max Hunter's picture

++.. Had to read it a couple times to match it up in my head... Love it.. You should have put the back-up vocals in parenthesis.. LOL

sourgrapesson's picture

Love that song!!  BTW did Mama Cass really choke on a ham sandwich?

Cathartes Aura's picture

of course, if you really wanted to know the truth of her death, a quick "search" would tell you it was from a heart attack (well known user of pharma-drugs) - but much easier to infer "food killed teh fattie!1!!". . .

 

Oquities, that was hilarious - good choice of karaoke backing tune!

Careless Whisper's picture

hmmm, trading below book value

thesapein's picture

No reserves might imply a negative value. Hard to trade below that unless you're on the other side.

Cleanclog's picture

Banks have severely been under-reserving for this, and frankly all their loans.  In California, more than 50% of banks are operating under MOUs, and not all banks have been visited by the regulating auditors in 2010, so still under the 1/yr visit.  More will be under MOUs soon.  And then they get the visit every 6 months and way more scrutiny.  

It's all still gonna get worse.  Move your banking activities to smaller, community banks.  The service is substantially better and they have a much better handle on their actual health.  Good luck!

TheMonetaryRed's picture

Dear Tyler, 

Our Algos are not understand what this is "fraudclosure"? Algos are make price gone, not good orders. 

Please explain. 

Quickly.

Thank you. 

 

Love, 

Team Atari

buzzsaw99's picture

Buy the dips bitchez!

EscapeKey's picture

BusinessInsider (/PragmaticCapitalist) claim QE2 is all about bailing out the banks, without going through congress:

http://www.businessinsider.com/qe2-is-not-a-recovery-plan-its-a-stealthy...