The benchmark for documented mortgage originators' lies is getting higher and higher. First it was the Allstate lawsuit, finding massive fraud in most Countrywide/Bank of America loans, then it was quantified at 70% after Wells Fargo sued JPM's EMC division, now it is all the way up to 91% after a just released lawsuit by the bulk of the world's biggest insurance companies has been made public, in a fresh lawsuit again Bank of America/Countrywide over "Massive mortgage fraud."
To wit, from the lawsuit: "In carrying out its review of the approximately 19,000 Countrywide loan files, MBIA found that 91% of the defaulted or delinquent loans in those securitizations contained material deviations from Countrywide’s underwriting guidelines. MBIA’s report showed that the loan applications frequently “(i) lack key documentation, such as verification of borrower assets or income; (ii) include an invalid or incomplete appraisal; (iii) demonstrate fraud by the borrower on the face of the application; or (iv) reflect that any of borrower income, FICO score, debt, DTI [debt-to-income,] or CLTV [combined loan-to-value] ratios, fails to meet stated Countrywide guidelines (without any permissible exception)." The plaintiff counsel is Bernstein Litowitz, which was made famous from the WorldCom litigation. We doubt they will settle for a few measily pennies on the dollar. As for the list of litigants, it is a veritable who's who of the insurance industry: Dexia Holdings, FSA Asset Management, New York Life iInsurance Company, The Mainstay Funds, Teachers Insurance & Annuity, TIAA-CREF Life Insurance, and College Retirement Equities Fund.
And here is why even the recent recent hike to BofA's Representation legal reserve, which Zero Hedge predicted in October, will be woefully insufficient to cover the tens of billions in incremental damages, monetary and punitive.
The Offering Documents for the Certificates at issue, which were relied upon by Plaintiffs, represented, among other things, that (i) the loans packaged into the Certificates were underwritten pursuant to the Countrywide Defendants’ specific loan origination guidelines; (ii) Countrywide Home (defined below) evaluated the prospective borrowers’ credit standing and repayment ability prior to approving any loan; (iii) when the Countrywide Defendants’ made an exception to the stated underwriting guidelines, they did so on “a case-by-case basis” and only if “compensating factors” justifying the exception were present; (iv) almost every mortgaged property received an independent appraisal which conformed to acceptable standards and formed the basis of its loan-to-value (“LTV”) ratio, an important metric to MBS investors; (v) the loans selected for securitization were chosen “in a manner [not] intended to affect the interests of the certificateholders adversely”; (vi) the “AAA” or other investment-grade ratings assigned to the Certificates were accurate reflections of the Certificates’ credit quality; and (vii) the Certificates’ issuing trusts possessed good title to the underlying mortgage loans. Each of these material representations was false when made, and Defendants knew or recklessly disregarded the falsity of these representations. Plaintiffs relied on the misrepresentations andsuffered losses as a result.