BIG SET-BACK FOR BANKS DEFENDING FRAUD ACTIONS

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EDITOR’S ANALYSIS: MBIA insured mortgage-backed securities created by Countrywide. The insurance contract provides that MBIA waives any right of subrogation or claim to the loans that were supposedly in the pool of loans that were morphed into some sort of entity (people call it a trust) that issued mortgage bonds. MBIA paid when the securities were downgraded to junk, which is to say that someone received money from MBIA on behalf of the pool (REMIC, trust) to cover the losses that were stated by the Master Servicer, over which MBIA had no control. MBIA even waived the right to contest the downgrade.

All of that means that a payment was made on the obligation owed to investors that arose when they advanced money to fund residential mortgage loans. That payment is the subject of the lawsuit between MBIA and Bank of America, who now owns Countrywide. The allocation of that payment has been ignored by virtually everyone. It is a third party payment against the obligation owed to the creditor(s) who funded the mortgage loans.

It is important to note that the obligation to the creditor investors arose BEFORE the Borrower ever even applied for a loan, much less received it. Thus the obligation arose by definition from entities other than the Borrower. THEN the Borrower entered the picture to complete the circle of deception and THEN the borrower accepted the loan without knowing its true character, and THEN the Borrower executed the promissory note without realizing they were in reality only issuing a security, rather than commercial paper.

Hence the insurance payment (or any third party payment under like condition) reduces the amount owed to the creditor who either received the money directly or indirectly through a trustee or other agent — an agent that may or may not have properly accounted for it to the investors.

In some cases, the payment reduced the obligation to zero.In such cases, which were many, the assertion of a default by the Borrower was meaningless. How can the Borrower be in default of an obligation that does not exist or which has been largely prepaid?

The gaslight strategy of the intermediaries who are pretending to be lenders is to collect the insurance, collect all payments covering the investment by the creditor and still collect on the same obligation from the Borrowers. They elected to take the money from insurance and other sources. Why should they be allowed to double dip and take money from Borrowers too?

The accounting to the borrowers and the Courts in foreclosure litigation has been completely absent, despite numerous RESPA 6 and other inquiries. By ignoring those payments and the consequential reduction in the obligation, the Courts have allowed claims for 100 cents on the dollar when in fact much less than that was owed. This in turn created the conundrum that borrowers faced when they submitted modification offers that were later rejected. The borrowers were not allowed to know how much was actually still owed to the investors and therefore were required to guess at the amount or accept the amount demanded.

All of this turns on the issue of the single transaction doctrine. In simply language the loan was a transaction between investors and borrowers with many intermediaries between them. Since it is the intermediaries who are initiating the foreclosures rather than the investors, they are not creditors and the amount they are demanding is misleading and fraudulent if there was an insurance payment — or any third party payment that reduced the obligation owed to the investors. Instead they are asserting claims for the entire obligation of the borrower at the closing while the real creditor has been paid in whole or in part by these credit enhancement tools. The collateral source rule does not apply as it would enable a creditor to claim and receive more than the contract amount.

Countrywide misrepresented the securities to MBIA, AIG and everyone else. The misrepresentations are spelled out in the lawsuit now pending in New York state court. BOA attempted to dismiss the fraud charges on the basis that MBIA did not show a direct connection between the misrepresentations and the damages suffered by MBIA. MBIA responded that they didn’t have to show such a direct connection. It was sufficient, they said, that the misrepresentations occurred, and had they known about the misrepresentations there was no way on Earth that they would have accepted the premium or signed the insurance contract.

The Court agreed with MBIA, thus significantly lowering the burden of proof to succeed with their fraud action. Settlement sure to follow. The significance of this is that the same argument can be applied to a fraud action for damages against the securitization participants and the loan originator.

But for the misrepresentations of the loan originator who appears on the note (without ever having funded the loan), the borrower would most likely NOT have signed the loan papers — and instead either dropped the whole idea or shopped around for a loan where there were not so many intermediaries that were making so much money and where the truth of the loan terms and specifically the life of the loan would have been adequately disclosed. In most cases, the failure of the loan sometime in the near future was already known to everyone except the borrower. The appraisal fraud, the selling of teaser loan payments, and other tools used to set siege upon unsophisticated borrowers all add up to material misrepresentations (lies) that induced borrowers to enter into contracts that were easily identified as loss creators, including the loss of reputation and credit ratings.

It is a fair statement to say that the investors would not have invested, the borrowers would not have borrowed, and the insurers would not have insured these transactions if they had known the truth. But for the investment by the investors there would have been no loans. But for the borrowers’ signature on the documents, there would have been no loan and hence, no investments. The mortgage meltdown would have never happened. But for the lies told the insurers there would have been no insurance. Without insurance, most investors would not have invested and the investment grade ratings for the securities would not have been obtained. Hence again, no investment, no loans, and no meltdown.

Which brings us to the final element that is oft discussed here. The execution of the promissory note was in fact the issuance of a security upon which other securities (mortgage bonds) were intended to derive their value. The abandonment of the claims and even the homes after foreclosure that are sitting vacant stand alone testifying to the fact that the mortgage loan designation was misleading in and of itself. This was a securities issuance scheme of which the apparent closing of a mortgage loan was a part.

But the “loan” and other documents were intentionally altered and neglected to allow time for the intermediaries to trade as though they were in fact the lenders when they most clearly were not. Had this fact been known by the borrowers or the investors, or the ratings companies, the mortgage bonds, the mortgages, the mortgage meltdown would have remained part of imagination rather than the basis of our terrible reality.

Like the insurance contracts all these loans were based upon fraudulent misrepresentations. The action for fraud is simple — damages, perhaps punitive or treble damages, attorneys fees and costs. With the profits in the trillions as earned by the intermediaries, it should be irresistible for enterprising lawyers to bring fraud claims on a continual basis piling up awards to their clients and huge amounts of attorney fees. Where are the attorneys?

Setback for Bank of America in a Lawsuit Filed by MBIA

By REUTERS

A New York state judge on Tuesday made it easier for the bond insurer MBIA to pursue its $1.4 billion lawsuit accusing Countrywide Financial, a unit of Bank of America, of fraudulently inducing it to insure risky mortgage-backed securities.

Justice Eileen Bransten of the New York State Supreme Court ruled that to show fraud, MBIA need only show that Countrywide had misled it about the $20 billion of securities that it insured, not that the misrepresentations caused its losses.

MBIA accused Countrywide of misrepresenting the quality of underwriting for about 368,000 loans that backed 15 financings from 2005 to 2007, while the housing market was booming. It said it would not have insured the securities on the agreed-upon terms had it known how the loans were made.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” Justice Bransten wrote, citing New York common law and insurance law.

While not ruling on the merits of the case, the judge lowered the burden of proof on MBIA to show Countrywide had committed fraud and breached the insurance contracts.

She also said MBIA could seek damages for its losses, rejecting Countrywide’s argument that the insurer’s only remedy was to void its insurance policies. MBIA had said that would be unfair to investors.

Manal Mehta, a partner at Branch Hill Capital, a hedge fund in San Francisco, said Bank of America had lost “one of its key defenses in the ongoing litigation over mortgage putbacks by the monoline insurers.”

Neither Bank of America nor MBIA officials were immediately available to comment.

Tags: Bank of America, bankruptcy, BOA, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, MBIA, modification, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
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