Newest Navigant Study Released: Shows Unprecedented Volume of Credit Crisis Litigation

Posted on December 19, 2008 by Isaac Gradman

Navigant Consulting, Inc. (NCI), a global consulting firm that releases quarterly reports on subprime mortgage and related case filings in the federal courts, released their newest study today, and the results are staggering (see MSN Money article here).

The report, entitled Third Quarter 2008 Update: Breaking New Ground, shows an unprecedented volume of cases stemming from the subprime mortgage crisis and related financial crises. Since January 1, 2007, 742 subprime mortgage-related cases have been filed in the federal courts, far exceeding the total number of cases arising out of the Savings and Loan crisis of the 1990s (which, at 559 cases, stood as the previous high-water mark for litigation stemming from a major financial crisis).
The report also shows an alarming rate of increase in case filings over the last year, a trend that promises to become more pronounced as economic conditions continue to worsen. The number of subprime-related case filings in the first three quarters of 2008 alone (448) already exceeds the total for all of 2007 (294) by over 52%!
The report also breaks down the categories of lawsuits, and notes a downward trend in the number of borrower class actions (which had been the previous leading category), while the number of securities lawsuits, contract disputes and investor actions increased sharply.
It’s important to keep in mind that the Navigant reports only track the cases filed in federal court, meaning the total litigation impact of the subprime crisis is much greater. Many times more subprime-related cases, such as contract disputes and misrepresentation actions, have been brought in state court over the last 21 months. Also, we can expect to see these filings increase as a result of, not just worsening market conditions, but the increased success of completed and existing suits (see prior posting here). As discussed previously, with the emergence of more details about the economic causes of the crisis and the unchecked lending culture that fueled this meltdown, the prospects of recovering subprime-related losses through litigation will only improve.
Posted in broader credit crisis, causes of the crisis, class actions, investors, lawsuits, litigation, misrespresentation, Navigant Consulting, Savings and Loan crisis, securities, subprime | Leave a comment

Plaintiffs Survive Motions to Dismiss in Major Subprime Class Actions Against New Century and Countrywide

Posted on December 15, 2008 by Isaac Gradman

The American Lawyer has reported that two important rulings were handed down earlier this month in the United States District Court in Los Angeles denying motions to dismiss class actions against former mortgage behemoths Countrywide and New Century. The Countrywide ruling was handed down by district court judge Mariana Pfaelzer, while the ruling against New Century was authored district court judge Dean Pregerson.

In the latter, Judge Pregerson had previously dismissed the case without prejudice, providing lead plaintiffs’ firm Bernstein Litowitz Berger & Grossmann an opportunity to amend the complaint to establish better support for their allegations of scienter (guilty knowledge) and loss causation. On the second go-round, plaintiffs had the benefit of the New Century bankruptcy trustee’s report, which reads like a how-to manual on unsustainable growth and contained juicy details regarding the financial hijinks that had been going on at the mortgage giant (I especially like the section on Loan Quality starting at p. 109, which discusses the importance of loan quality to a lender, the fact that New Century recognized it had loan quality problems as early as 2004, and the fact that New Century “devoted little attention to improving loan quality until 2006 and did not focus specific attention until the final quarter of 2006, which was too late to prevent the consequences of longstanding loan quality problems in an adversely changing market.” Sounds kind of familiar, doesn’t it?).

Up to this point, not many early subprime class action cases have made it past the demurrer or motion to dismiss phase of the proceedings (see report by Gibson Dunn & Crutcher on early trends in subprime fraud litigation). However, as additional fodder emerges regarding the goings-on at some of the larger lenders and mortgage originators, from bankruptcy reports, lawsuits, or other independent reports (see, for example, this fascinating report on IndyMac Bank from the Center For Responsible Lending (CRL)), we can expect to see plaintiffs’ attorneys having more success in laying out specific factual allegations of negligence, fraud, concealment and other claims requiring scienter. Judging by some of the accounts of former employees from the CRL Report on IndyMac and others, there certainly was no shortage of mortgage fraud being perpetuated by many lenders as they strained for greater volume during height of the subprime boom; it’s only a matter of time before plaintiff’s attorneys learn how to dig up and incorporate these details into compelling class action complaints.

Posted in bankruptcy, class actions, Countrywide, IndyMac, lawsuits, litigation, loss causation, mortgage fraud, motions to dismiss, New Century | Leave a comment

Under Countrywide Stipulated Judgment, Investors Must Be Consulted

Posted on December 9, 2008 by Isaac Gradman

After reviewing the Complaint filed by hedge fund Greenwich Financial Services against Countrywide and BofA and listening to the comments made last week by Greenwich CEO William Frey and his attorney regarding the case, I decided to take a closer look at the Countrywide settlement with the attorneys general of several states to see how it treated the investors holding the Countrywide-originated loans at issue. Frey has alleged that Countrywide’s settlement does not adequately take investor interests into account, while actually imposing the costs of the loan modifications required by the settlement on investors.

Upon closer examination of Countrywide’s Stipulated Judgment and Injunction with California Attorney General Edmund Brown (posted below), I was surprised to find that Countrywide is instructed several times to consult with or consider investor interests in the loan modification process, albeit in fuzzy language that may be easy to skirt.

For example, pursuant to Section 6.2.1(a), Countrywide is required to make “an individualized evaluation of the Borrowers’ economic circumstances… to determine if alternatives to foreclosure are available, and consistent with the directions of the investors, if applicable.” (emphasis mine)

In Section 6.2.1(b), Countrywide is required to “maintain the current practice of offering Delinquent Borrowers who desire to remain in their homes and who can afford to make reasonable mortgage payments loan modification or other workout solutions, subject to applicable investor guidelines and approvals.” (emphasis mine)

Finally, in what will likely be one of the key provisions at issue in the Greenwich action, Countrywide represents in Section 6.3.7(e) that it currently has, or reasonably expects to obtain, “discretion to pursue the foreclosure avoidance measures outlined in Section 6 of this Stipulated Judgment and Injunction for a substantial majority of Qualifying Mortgages. If [Countrywide does] not have discretion to pursue these foreclosure avoidance measures, best efforts will be used to obtain appropriate investor authorization.”

These provisions immediately raise several questions regarding which investors must approve these modifications. Would a majority of interested investors being in favor of the modifications constitute investor approval or authorization? Or could one disgruntled investor like Greenwich Financial have the ability to block all modifications involving loans in which it invested?

Moreover, the fuzzy language surrounding these provisions leaves their enforceability up in the air. What constitute “applicable investor guidelines and approvals”? Must these be found in the language of the respective Pooling and Servicing Agreements (PSAs)? “Appropriate investor authorization” certainly sounds like it stems from such agreements. Moreover, the term “best efforts” is highly subjective and unlikely to permit one investor to block an $8.68 billion settlement. Ultimately, the outcome of the suit by Frey and Greenwich Financial will probably turn on whether this Stipulation accurately and appropriately incorporates the language in the PSAs regarding the requirements for investor approval.

Countrywide Judgment http://documents.scribd.com/ScribdViewer.swf?document_id=8757860&access_key=key-1e9711dm3qwyfgwd0ejg&page=1&version=1&viewMode=

Posted in Attorneys General, BofA, Countrywide, Greenwich Financial Services, hedge funds, investors, Jerry Brown, lawsuits, litigation, loan modifications, settlements, stipulated judgments, William Frey | Leave a comment

William Frey and David Grais Appear on Fox News to Defend Greenwich Suit Against Countrywide

Posted on December 6, 2008 by Isaac Gradman

Greenwich Financial Services CEO William Frey and his attorney, David Grais, of Grais & Ellsworth LLP appeared on Fox News on Tuesday to answer questions about their lawsuit against Countrywide (see other postings on this story). In the segment, linked below, Frey maintains that Countrywide’s settlement with the attorneys general of several states requires a large portion of the cost to be borne by investors, rather than by Countrywide itself. Interestingly, Grais argues that “we are all in favor of modifications,” but also asserts that, “this is Countrywide’s problem and Countrywide ought to bear the cost of helping the borrowers, who they never should have made these loans to in the first place.”

You can view the full segment here.

Posted in costs of the crisis, Countrywide, Fox News, Greenwich Financial Services, investors, lawsuits, loan modifications, predatory lending, settlements, television coverage of the crisis, William Frey | Leave a comment

Details of Greenwich v. Countrywide Emerge

Posted on December 5, 2008 by Isaac Gradman

An article published on Monday in Business Week (available here) sheds some additional light on the lawsuit filed by Hedge Fund Greenwich Financial Services against Countrywide challenging its agreement to conduct large-scale loan modifications (previously discussed here, here, and here).

Though his name is not mentioned in the complaint, the moving force behind the lawsuit is Greenwich Financial CEO, William Frey, a self-styled “advocate for investors’ contractual rights” (see a short bio on Frey here). The complaint seeks class action status on behalf of “all persons or entities that own or hold certificates in one or more of” over 100 Countrywide securitizations.
As the Business Week article points out, Frey has been vocal in his opposition to loan modifications since March of this year and maintains that he’s on a crusade to protect the rights of all investors who purchased Triple A-rated bonds, not just those who bought bonds backed by Countrywide mortgages. Frey argues that such modifications violate contract law and thus discourage future investment in the U.S. financial system. Frey has received pressure from Washington legislators, including in the form of a letter signed by, among others, Barney Frank (D-Mass.), Maxine Waters (D.-Calif.) and Luis v. Gutierrez (D.-Ill.), to back off of his position and allow the bailout bill to go through. You can view Frey’s letter in response here.
An interesting side note raised by the article is that Ocwen Loan Servicing, the largest subprime mortgage servicing company, could become the target of additional lawsuits challenging loan modifications if workouts are found to violate securitization contracts. Though the general counsel for Ocwen is quoted as saying that servicers are bound to pursue modifications that benefit all parties, this becomes difficult when, as is often the case, the various parties’ interests conflict.
As loan modification looks to be central to any plan to stabilize the mortgage market, the outcome of these legal battles will be pivotal to the question of who bears the cost of the subprime and broader financial crises. Look for these lawsuits to heat up and multiply over the coming months.
Posted in BofA, contract rights, costs of the crisis, Countrywide, Greenwich Financial Services, lawsuits, litigation, loan modifications, Ocwen, securitization, stability, subprime, William Frey, workouts | 3 Comments