SEC Demands More Disclosure From JP Morgan on Repurchase Liabilities

Posted on June 24, 2010 by Isaac Gradman

By Manal Mehta, Guest Blogger
The Securities and Exchange Commission (SEC) recently took a much needed step towards improving the transparency of bank balance sheets, particularly when it comes to the adequacy of reserves for mortgage repurchase obligations stemming from banks’ violations of representations and warranties.
Due to findings of mortgage fraud and underwriting deficiencies in the mortgage origination process and  misrepresentation in the packaging of mortgages, banks have been experiencing a drastic increase in the number of repurchase demands they are receiving, including from Government-Sponsored Entities (“GSE”), monoline and mortgage insurers and other end purchasers of RMBS securitizations, such as the Federal Home Loan Banks.  Banks have responded by taking on additional reserves, which have had the effect of reducing mortgage income in the corresponding period.  Now, however, in a letter dated January 29, 2010, the SEC has asked JP Morgan to clarify its reserving methodology for mortgage put-backs—a process that has historically been opaque and difficult for outsiders to evaluate.
As an investor, I have long been concerned with whether the banks’ levels of reserves represent accurate reflections of their true liability.  Just to get a sense of the magnitude of this issue, in SEC v. Angelo Mozilo, the SEC alleges that Countrywide originated over $450 billion of mortgages annually during the boom years.  What percentage of those Countrywide mortgages were fraudulently originated?  What percentage are getting sent back for repurchase? Even a modest percentage could lead to substantial losses for Bank of America (“BofA”), Countrywide’s parent and potential successor in liability (see Subprime Shakeout post on recent ruling in MBIA v. Countrywide).
Additionally, there is some alarming evidence that BofA actually did assume the liabilities of Countrywide, and is thus on the hook for the liabilities of its subsidiary.  At the time of Bank of America’s purchase of Countrywide, Scott Silvestri, a Bank of America spokesperson is quoted as saying, “[w]e bought the company and all of its assets and liabilities.  We are aware of the claims and potential claims against the company and factored these into the purchase”  (emphasis added).  This led Florida Attorney General Bill McCollum, in announcing his intention to negotiate a settlement with Countrywide regarding predatory lending practices, to say, “there is technically a deep pocket.  They’ve [BofA] acquired them [Countrywide], they assume their liabilities.”
The SEC’s actions are very important in this debate over mortgage buybacks.  The SEC has asked JP Morgan to clarify its reserving methodology in the following five areas:
a)  The specific methodology employed to estimate the allowance related to various representations and warranties, including any differences that may result depending on the type of counterparty to the contract.
b)  Discuss the level of allowances established related to these repurchase requests and how and where they are classified in the financial statements.
c)  Discuss the level and type of repurchase requests you are receiving, and any trends that have been identified, including your success rates in avoiding settling the claim.
d)  Discuss your methods of settling the claims under the agreements. Specifically, tell us whether you repurchase the loans outright from the counterparty or just make a settlement payment to them. If the former, discuss any effects or trends on your nonperforming loan statistics. If the latter, discuss any trends in terms of the average settlement amount by loan type.
e)  Discuss the typical length of time of your repurchase obligation and any trends you are seeing by loan vintage.
The monoline insurers have constantly complained that banks have continued to be amenable to processing repurchase requests and repurchasing loans associated with Fannie and Freddie due to the necessity of continuing a business relationship with the GSEs.  They claim that for similar violations of rep & warranties, however, the mortgage originators have denied their repurchase requests.  This requirement from the SEC asking for clarification on discriminating between repurchase requests from the GSEs versus the monolines/other investors should have interesting consequences.  As Jay Brown, the CEO of MBIA, recently stated in the company’s Q1 2010 conference call, “we have discussed the process that Fannie and Freddie use with their folks to see how it compares to the process that we use both from examining the loans and also in terms of the accounting, and both approaches are consistent with our own.”
The SEC’s requirement to provide clarity on the counterparties to repurchase requests should lead to more fair treatment for the insurers.  The requirement to provide increased disclosure on mortgage putbacks from the insurers could also ratchet up the pressure on the banks to settle repurchase requests.  If they honor repurchase requests from Fannie and Freddie for very similar violations of reps & warranties but refuse to honor them for the insurers, continuing to litigate could lead to large damage claims for adverse rulings in court.
For investors who may not be aware of how significant of an issue this is for the banks, it is imperative to read the testimony of Richard Bowen in front of the Financial Crisis Inquiry Commission.  Dick Bowen was the Senior Vice President and Chief Underwriter for Correspondent Acquisitions for Citigroup Mortgage.  In early 2006, he was promoted to Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group.  The numbers he cites in his testimony are astounding.  I will allow his testimony to speak for itself:
The delegated flow channel purchased approximately $50 billion of prime mortgages annually… In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup…I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group…We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production. (emphasis added)
Digging through Citi’s public financials, it is unclear what reserves have been set aside to reflect the possibility of these noncompliant mortgages travelling back to Citi’s balance sheet.  The SEC’s recent letter to JP Morgan should provide increased disclosure for these types of liabilities lurking on bank balance sheets.

David Grais’s lawsuits on behalf of the Federal Home Loan Banks (“FHLB”) against investment banks involved in the packaging of RMBS securitizations that were bought by the FHLB also provide for interesting reading.  The Federal Home Loan Banks bought $23 billion of RMBS securitizations from a number of investment banks.  These structured products contained representations regarding maximum LTV ratios on the underlying mortgages.  In these lawsuits, the FHLBs of San Francisco (complaint available here) and Seattle (complaint available here) contend that widespread appraisal fraud led to incorrect LTV reps on the pools of mortgages purchased by the FHLBs.  They are suing to recover losses stemming from their purchases of these mortgage securities.  David Grais was a roommate of Supreme Court Justice Samuel Alito for three years while they were undergraduates at Princeton University.  His legal credentials and ability to undertake complex litigation should not be underestimated.  

As Gretchen Morgenson writes in the New York Times, though disputes over losses from mortgage-backed securities are hard to litigate because investors must persuade factfinders that their losses were not simply the result of a market crash,
[r]ecent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.
You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.
The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.
These findings are compelling because they involve some 525,000 mortgage loans in 156 pools sold by 10 investment banks from 2005 through 2007. And because the research was conducted using a valuation model devised by CoreLogic, an information analytics company that is a trusted source for mortgage loan data, the conclusions are even more credible . . .
The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.  That means inflated appraisals were involved in six times as many loans as were understated appraisals . . .
It is unclear, of course, how these court cases will turn out.  But it certainly is true that the more investors dig, the more they learn how freewheeling the Wall Street mortgage machine was back in the day.
Investors should take a hard look at bank balance sheets to understand the adequacy of reserves for this huge contingent liability.  It is not surprising that banks have stonewalled any attempt to get clarity on this issue – hopefully the SEC’s explicit demands from JP Morgan to increase their disclosure will have a knock-on effect for the others. 

Manal Mehta is a Principal at Branch Hill Capital, which invests in Special Situations.

Posted in balance sheets, BofA, Citigroup, Countrywide, Federal Home Loan Banks, guest posts, investors, JPMorgan, lawsuits, litigation, mortgage insurers, repurchase, reserve reporting, SEC | 1 Comment

Investor Syndicate At Hundreds of Billions And Growing

Posted on June 16, 2010 by Isaac Gradman

Heard on this Street this week: the super-secret Syndicate of MBS Investors discussed previously is gaining momentum.  A confidential source has informed me that some of the largest institutional investors in mortgage-backed securities have now joined the group, bringing the amount under management to “hundreds of billions of dollars in MBS investments.”  The source further informed me that this number is expected to swell to a “jaw-dropping dollar figure.”

As discussed before, the Syndicate hopes to amass enough representation in enough securitizations throughout the country to take over those trusts pursuant to the terms of the respective Pooling and Servicing Agreements (PSAs).  These contracts often require 25% class ownership to petition the Trustee to take action and 50% ownership to fire the Trustee or Master Servicer.

Once the Syndicate has reached critical mass, it reportedly will approach the Trustees of a number of deals to present evidence of Servicer misconduct and request the Trustee to take action to remedy Servicer breaches (including firing the Servicer).  If the Trustee does not comply, the Syndicate plans to fire the Trustee and Servicer, and install friendly institutions in their place.
At that point, the Syndicate would likely pursue two major courses of action: 1) take over the servicing of the deals and begin servicing the loans in the trust in accordance with bondholder wishes (including liquidating or modifying loans in default, depending on which option makes the most economic sense over the long term) and 2) pursue remedies against originators for losses caused to the pool.  This second prong would involve pouring over loan files obtained from the prior servicer to look for breaches of reps and warranties in the origination and underwriting of the loans.  This will almost certainly lead to a jump in mortgage litigation seeking to compel originators to buy back or repurchase loans that were improperly originated (to the extent these originators are still solvent).
Again, loan files are critical, because they reveal the fundamental characteristics of each loan and the underwriting determinations made in the approval of such loans.  Though certain plaintiffs have recently made strides towards forcing servicers like Countrywide to turn over loan files (see also Order Granting Motion to Compel in Syncora v. Countrywide), the acquisition of these all-important documents remains a difficult proposition.  Investors are increasingly coming around to the idea that the only way they will be able to obtain these files is by force–namely, firing Servicers and taking over their duties and documents.
I will continue to provide updates on this fascinating development as they become available, and expect that we’ll begin to hear more about the Investor Syndicate in the mainstream media in the coming months.  Stay tuned…
Posted in Countrywide, firing servicers, Investor Syndicate, investors, irresponsible lending, litigation, loan files, MBS, repurchase, servicers | 2 Comments

BofA and Countrywide Appeal Order Allowing MBIA Vicarious Liability Claim To Proceed

Posted on June 10, 2010 by Isaac Gradman

In a move that could have dramatic consequences for the financial stability of Bank of America (BofA), a New York state court judge has held that monoline bond insurer MBIA can go forward with claims that BofA be held vicariously liable for claims against its subsidiary, Countrywide.  BofA has already filed an appeal of the Order, issued by Judge Eileen Bransten in New York State Supreme Court in the case of MBIA v. Countrywide Home Loans, et al. Bransten held, among other things, that MBIA could proceed with its argument that BofA was vicariously liable for the debts of Countrywide as successor-in-interest, based on a claim of a de facto merger between the companies.

In the case, MBIA alleges that a significant percentage of tens of thousands of home equity lines of credit (HELOCs) and second-lien loans issued by Countrywide entities in various securitizations insured by MBIA failed to comply with Countrywide’s underwriting guidelines or other reps and warranties.  Bransten’s Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss, issued on April 27, 2010, denied Countrywide and BofA’s motion to dismiss as to MBIA’s claims for fraud, breach of the implied covenant (though this claim was narrowed) and successor and vicarious liability against BofA, while granting the motion to dismiss as to MBIA’s claim for negligent misrepresentation.

The transcript of the oral argument surrounding this motion makes for particularly entertaining reading (at least for mortgage litigation nerds, such as myself).  In that hearing, David Apfel, counsel for BofA and Countrywide, argued that the successor liability claim was “frivolous,” and that MBIA should not be allowed even to pursue discovery regarding the issue.  Judge Bransten did not buy these arguments, denying BofA’s motion to dismiss as to the successor liability claim and ordering discovery to move forward.  Bransten also expressed significant dissatisfaction with the pace of the production of documents from BofA and Countrywide.  In response to Apfel’s statement that, “Countywide ha[s] been working hard [at discovery],” the Judge responded, “It’s not going well enough… Get discovery, documentary discovery done.”

This ruling came on the heels of another adverse ruling for Countrywide emanating from Bransten’s pen.  In a related case styled Syncora Guarantee, Inc. v. Countrywide Home Loans, Inc., et al., Bransten ordered Countrywide to begin producing loan files underlying the delinquent loans in three securitizations insured by bond insurer, Syncora.  The Syncora case (along with MBIA v. Countrywide and FGIC v. Countrywide) is one of three related bond insurance cases involving BofA and Countrywide before Judge Bransten (note: bond insurers provide insurance on an entire securitization, or pool of loans, rather than on individual loans).  The acquisition of loan files, and servicers’ reluctance to turn over the same, is a critical issue for investors pursuing claims against originators and servicers for irresponsible lending practices in connection with the loans underlying the mortgage-backed securities they purchased.

Bill Frey, whose broker-dealer, Greenwich Financial Services, is the plaintiff in a lawsuit against Countrywide in New York state court, has been closely following the bond insurance litigation against Countrywide and BofA in New York.  He commented on Judge Bransten’s recent rulings that, “it sounds like [Judge Bransten] understands that you need to honor commitments and contracts if you are going to have an economy work.”  Frey’s suit, which seeks to force Countrywide to pay for the loan modifications it has agreed to perform in a settlement with the Attorney Generals from more than 30 states, awaits a ruling on Countrywide’s motion to dismiss.

Yet, while those with claims against Countrywide are watching this litigation closely, most of the mainstream media has been slow to recognize the significance of these decisions.  Certainly, if BofA is on the hook for the massive potential liabilities of Countrywide stemming from its years of volume lending, this could undermine Bank of America’s solvency, which, in turn, could have a dramatic ripple effect on the other major banks and the financial system as a whole.  BofA will have to take a stand, and whether or not this litigation is where BofA’s ultimate liability is determined, contesting Bransten’s vicarious liability ruling will be an important first battle.

Andrew Longstreth gets it.  In an April 29, 2010 article for AmLaw Litigation (subscription required), Longstreth notes that this is the first time a judge has allowed claims to proceed against BofA for the liabilities of Countrywide.  Longstreth quotes MBIA’s attorney, Phillip Selendy, as saying, “[the decision] is going to have an impact beyond this case.”  That could be the understatement of the year.

BofA/Countrywide filed the Notice of Appeal (available here) on May 28, 2010, indicating that it would be challenging the adverse portions of the April 27 ruling before the Appellate Division of the Supreme Court of the State of New York, in and for the First Division.  BofA/Countrywide also filed a Pre-Argument Statement (available here) before the Appellate Court, in which it argued that Judge Bransten improperly applied New York law, rather than Delaware law, to determine the issue of successor liability, and that MBIA failed to allege, as required, that the merger between the companies “was engineered to disadvantage Countrywide’s shareholders or creditors.”  BofA/Countrywide further decried the fact that, since Bransten’s decision on vicarious liability, both FGIC and Syncora have amended their complaints against Countrywide to add BofA as a defendant.

This may be one of the primary reasons that BofA has chosen to pursue the risky strategy of appealing Bransten’s Order.  Though the ruling does not definitively hold that BofA and Countrywide entered into a de facto merger–it simply allows such a claim to move forward–BofA faces the prospect of other litigants being emboldened to bring claims against BofA wherever they have claims against Countrywide.  Though BofA runs the risk that, by appealing, it could suffer an adverse ruling at the hands of the Appellate Division of New York Supreme Court–a ruling that would have broader precedential value than Bransten’s Order–BofA has presumably decided to take an early stand in the hopes of cutting off the flood of litigation before it begins.

Yet, it is unclear whether BofA has as strong a case as it thinks.  The de facto merger exception to the general rule that an acquirer does not become responsible for the liabilities of the acquired corporation turns on whether the acquirer absorbs and continues the prior operations of the acquired corporation or dissolves the company’s management and general business operations.  MBIA has alleged facts showing that BofA retired the Countrywide brand, including its website, and cites favorable New York case law holding that all-stock acquisitions, such as BofA’s acquisition of Countrywide, suggest that a de facto merger has occurred.  MBIA also cites BofA’s pursuit of a settlement of predatory lending suits with state Attorneys General immediately following its acquisition as evidence of the cessation and dissolution of Countrywide’s business.

BofA’s primary argument on appeal appears to be that Bransten erred in applying New York law to the vicarious liability claim.  The bank argues that Bransten should have instead applied Delaware law, which is more favorable to acquirers wishing to avoid successor liability.  But the argument has the distinct feel of a Hail Mary, as it did not appear to be a focus in BofA’s briefs, and Apfel did not even raise it during oral argument on the motion.

In fact, Apfel repeatedly exhorted Judge Bransten to read an order from Judge Mariana Pfaelzer the Central District of California from the case Argent v. Countrywide, which Apfel described as featuring “the exact same facts” as MBIA. Bransten actually excoriated Apfel at one point to direct her towards a New York case, saying “please, please, there must be a New York case that we can rely on.  At least, give me some guidance” (see transcript at 41-42).  Apfel responded, simply, “[o]kay.”  Id. At no point did BofA’s counsel argue that Delaware law should actually apply.

Instead, Bransten appeared to become quite irritated at Apfel’s repeated entreaties for her to read Argent–again, a California case.  At one point, after Bransten asked Apfel to move on to his next argument and Apfel again asked Bransten to read Argent, Bransten responded, “as I stated before, I’m going to read it, all right.  I mean, you don’t have to remind me to read it… It’s only been the tenth time asking me to read it” (see transcript at 41-42).

Meanwhile, the MBIA litigation moves forward, and MBIA has filed a Motion to Compel, to force Countrywide to produce 1) delinquent loan files, 2) documents Defendants previously produced to various state Attorneys General in connection with their settlement with Countrywide, and 3) documents relating to BofA’s successor liability.  The Reply brief, filed June 8, is available here.  BofA and Countrywide will certainly fight hard to avoid turning over these critical documents.  But, judging by Judge Bransten’s recent opinions, and her palpable frustration with BofA’s discovery conduct, I don’t like the bank’s chances of avoiding this production.

[Many thanks to Manal Mehta for sharing many of the documents featured in this post – IMG]
Posted in Attorneys General, BofA, bondholder actions, Countrywide, Greenwich Financial Services, loan files, merger, mortgage insurers, predatory lending, settlements, successor liability, vicarious liability, William Frey | 10 Comments

Federal Short Sale Programs Will Face Same Shortcoming As Workouts: Too Much Carrot, Not Enough Stick

Posted on May 11, 2010 by Isaac Gradman

With government-backed loan modification programs showing abysmal results, Washington has turned to short sales as the flavor of the week to ameliorate the foreclosure crisis.  Pursuant to the Treasury Department’s Home Affordable Foreclosure Alternatives (HAFA) initiative, effective April 5, loan servicers will be offered a $1,500 cash incentive to enter into “short sales” with borrowers, meaning allowing underwater borrowers to sell their homes at less than the amount of the unpaid principal balance remaining on their loans.

Yet, this mechanism suffers from the same drawbacks as loan modification programs–namely, that the approval or cooperation of the servicer is required to complete the sale.  Due to their well-documented conflicts of interest, it is highly unlikely that servicers will voluntarily agree to write down principal on the loans they service, which would also involve writing down their junior lien holdings and foregoing their right to collect late fees from delinquent borrowers out of the equity of the home.

A recent article published by Senior Editor Thomas Brom in California Lawyer magazine shows that experts and commentators have generally reached the same conclusion about the likelihood of success of short sale programs.  Besides including quotes from me and The Subprime Shakeout regarding the allocation of losses associated with the crisis and the intransigence of originators and services that have prevented such losses from being recognized, I enjoyed Brom’s article because it does a great job of summarizing the legal implications of short sale programs.

What I would add to that discussion is that Congress’ ongoing failure to make any decision regarding who should bear the losses associated with unchecked lending means that they will still be unable to voluntarily induce servicers to go along with their new programs.  If you’ll recall, Washington tried the same thing by offering $1,000 cash incentives to servicers who would engage in a government-approved loan modification.  And we all know how well Washington’s loan modification  programs have been performing.

Besides offending any notions of fairness by paying banks to liquidate loans they improperly approved in the first place, Congress’ attempt to induce compliance by raising the cash offered by $500 smacks of a fundamental misunderstanding of the incentives and dollars at play.  Servicers often hold junior liens on these homes in the amount of 5-20% of the value of the home.  For a home valued at $300,000, that’s a lien worth anywhere from $15,000 to $60,000 for which the security interest would be wiped out if the servicer agreed to the short sale.  Is any rational utility maximizing servicer going to give that up for $1,500 cash?  What about all the late fees the servicer is raking in for every month the borrower is delinquent that the servicer would now have to forgo?  What if the servicer also owns the primary lien on the house and would have to write off tens of thousands of dollars in principal?  A quick fact check shows that the HAFA short sale program will likely suffer the same fate as those programs that came before it.  Though Congress’ heart is in the right place, it lacks either the stomach or the understanding of the situation to craft an effective solution.

As I’ve talked about before, the carrot will not work with servicers.  They are too firmly entrenched and their livelihood is too dependent on the status quo to ever expect them to voluntarily comply.  Unless Congress creates a program that clearly defines who should bear the losses associated with alternatives to foreclosures–and optimally places them square in the lap of the lenders/servicers where the loan was originated in violation of the stated guidelines–we’ll be seeing more of the same foot-dragging and lip service from the servicers that we’ve seen all along.

Posted in allocation of loss, California Lawyer, conflicts of interest, foreclosure rate, HAFA, incentives, loan modifications, servicers, short-selling, Treasury | 1 Comment

Class Action Lawsuit Against Goldman Over ABACUS CDO Signals Time Is Right For Investor Lawsuits

Posted on April 29, 2010 by Isaac Gradman

The legal news is not good if you are a lender or investment bank who participated in the creation of mortgage-backed securities (“MBS”) and other derivatives over the last few years.  But for investors who lost their shirts through their investments in these derivative products, the chinks appearing in the armor of the nation’s largest banks signal the time is right for aggressive legal action.

In the wake of the charges brought against Goldman Sachs last week by the SEC, Goldman already faces several lawsuits related to the ABACUS 2007-AC1 collateralized debt obligation (CDO) from investors and shareholders.  On Monday of this week, plaintiff Howard Sorkin filed a class action lawsuit (complaint available here) on behalf of all investors in Goldman Sachs common stock for losses stemming from the SEC’s action against the bank.  The suit was filed in the United States District Court for the Southern District of New York and alleges that Goldman knew of the impending SEC investigation as early as July 2009 (having received a “Wells Notice”), but concealed these facts from its investors.

A Wall Street Journal article indicates a similar class action lawsuit was also filed against Goldman this week by a shareholder named Ilene Richman.

Bloomberg reports that Goldman is also facing two derivative lawsuits related to Goldman’s involvement in the creation of subprime mortgage CDOs, with Goldman shareholders claiming that its top executives failed to provide sufficient oversight with respect to the deals.  In derivative actions, the shareholders make a demand upon the company’s board of directors to take action against its executives, and may only bring a lawsuit if the board refuses or is conflicted.  Though these actions against Goldman pertain to their participation in the creation of CDOs in general, facts regarding the SEC’s charges stemming from ABACUS 2007-AC1 should certainly figure prominently in the cases.

Bloomberg also notes that a class action is already pending against Goldman Sachs in federal court in New York.  The action, filed by Public Employees’ Retirement System of Mississippi against Goldman Sachs, Moody’s, Fitch and others (Second Amended Complaint available here), alleges that Goldman misrepresented that certain mortgage-backed securities it sold with high ratings were not of the same quality as other investments with the same ratings. This action has been pending in the United States District Court for the Southern District of New York since July 2009.

This flood of litigation against Goldman comes on the heels of a $600 million settlement entered into by Countrywide in a federal class action lawsuit brought by a group of New York retirement funds.  The deal still requires the approval of several pension boards who are plaintiffs in the case and the judge presiding over the case, but if accepted, it would be the largest settlement to arise out of the wave of subprime securities class actions filed in 2008 (and the 13th largest securities fraud class action settlement in history according to the RiskMetrics’ Group list). This result comes after Countrywide settled a lawsuit with dozens of Attorneys General for well over $8 billion in agreed-upon loan modifications (though readers familiar with this blog will remember that, pending the outcome of an investor lawsuit challenging the settlement, Countrywide stands to bear only a fraction of that cost, as it no longer owns most of the loans at issue).

All this leads me to believe that the time is right for investors with the temerity to take on the major Wall St. banks to file lawsuits to recover their losses stemming from subprime and Alt-A mortgage investment vehicles.  The evidence is overwhelming that lenders misrepresented their quality control standards and guidelines (or did not follow them at all), and thus are on the hook in most cases to buy back deficient loans or replace them with performing mortgages.  Moreover, the recent investigations into the role of investment banks in sponsoring and setting up these deals will provide an additional avenue for attack.  If investment banks knew that they were putting together a “sh***y deal,” as Goldman exec Daniel Sparks characterized a Goldman-sponsored CDO in an email produced to Congress this week, this would open the door to all kinds of claims, from Securities Act and Blue Sky statutory violations to common law contract and misrepresentation claims.

It is facts like these–showing that top bank executives knew the deals they were putting together were doomed to fail–that will turn the tide in investors’ favor.  Though banks have had some success in fending off mortgage crisis litigation thus far by using the “global financial catastrophe” defense, the argument that nobody saw this coming will carry much less water now that it is becoming clear that many–including top bank executives–saw the writing on the wall (read Michael Lewis’ new book, The Big Short, to dispel any notion that this crisis came as a total surprise).  Indeed, in suits filed pursuant to the 1933 Securities Act (even those brought before the SEC action against Goldman hit the news), investors are seeing more success than the mainstream media lets on, according to leading subprime litigation commentator, Kevin LaCroix.

So, for those investors who were waiting for the political and regulatory climate to turn before taking action, here is your wake up call.  With more and more evidence emerging that mortgage origination standards plummeted between 2005 and 2007–and that the investment banks condoned and profited from this irresponsible lending–there has never been a better time to become a mortgage crisis plaintiff.

Posted in abacus, Countrywide, derivative lawsuits, Goldman Sachs, investors, litigation, MBS, SEC, securities, securities fraud, shareholder lawsuits | 3 Comments