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If Insurers Are Rejecting Defective Loans Why Don’t The Courts?

Editor’s Comment: 

Insurers of all stripes are rejecting claims for failed mortgages at a rate that is becoming troublesome to the Megabanks. Moynihan at BOA thinks that (a) the insurers should pay or (b) the taxpayers should pay for it. He thinks BOA should be absolved of all liability for defective loans. I’m sure that taxpayers would disagree. As for the insurers, they have investigated, considered, analysed the origination of loans and found them wanting in all major respects. In other words the risk they agreed to insure did not produce the loss which is the basis for the BOA claim.

 

What produced the loss for the BOA claim is that the loans were never subjected to any underwriting process that even remotely resembled loan underwriting before the banks began creating the appearance of selling parts of loans to many buyers and pools of loans to many buyers. And the biggest problem is that BOA doesn’t have a loss. The investors have the loss but their asset rights have been hijacked onto megabank balance sheets.

 

In particular, the insurers have found exactly what we have been writing about on this blog for five years. 

 

1. The value of the property was inflated by the “lender”.

2. The lender was really a paid originator — a pretender lender.

3. The borrower’s income was patently false, inflated by the “lender” originator.

4. The satisfaction of the prior loan was obtained from a party who demonstrated no ownership or agency.

5. The terms of the loan frequently guaranteed that the borrower would stop paying — as when the payments reset to a level that exceeds the borrower’s annual income including everyone in his household.

6. The false value used for the property fraudulently inflated the principal due on the loan and fraudulently inflated the payments due on the inflated principal.

7. The true value of the collateral at the time of origination of the loan was less than the stated principal due on the loan— a fact that was withheld from all the players in violation of TILA but more importantly creates two classes of debt on the same loan — one secured and the other unsecured. The unsecured portion is the difference between the true fair Market value and the inflated value that was used at closing (or the deficiency of collateral at the time of closing).

8. The promissory note contains two principal defects in most instances — (1) it contains false declarations as to the identity of the lender and the amount due and (2) it creates an instantaneous liability to the borrower who did not get the benefit of the bargain he or she was promised.

 

So my question is this — if insurers can refuse to pay based upon these defects why is it that the assumption prevails that borrowers must pay based upon these defects? Doesn’t it make more sense to reform the notes and mortgages to name the proper creditor, name the proper secured party, state the proper amount due and then have the insurer pick up the tab if there is a tab? Of course that analysis might mean that we simply accept the conclusions that insurers have arrived at — the loans are defective. And THAT would mean that most of the foreclosures could be overturned.

BofA Clash With Fannie

Intensifies as Insurers Reject

Loans

By Hugh Son – Mar 2, 2012

Bank of America Corp. said it’s facing more demands by Fannie Mae for refunds on flawed home loans because mortgage insurers who cover defaults rejected 25 percent more claims last year.

Unresolved insurance rejections rose to 90,000 at the end of 2011 from 72,000 the year earlier, Bank of America said last week in its annual filing with regulators. Last year’s denials equal $1.2 billion in unpaid loan balances, according to a note yesterday by Compass Point Research and Trading LLC.

A Bank of America Corp. loan negotiator at the Neighborhood Assistance Corporation of America (NACA) Save the Dream event in Los Angeles on Feb. 16, 2012.

The rejections heighten tension between Brian T. Moynihan, the bank’s chief executive officer, and U.S.-owned Fannie Mae in their disputes over who must pay for billions of dollars in failed loans made during the housing boom. When mortgage insurers deny claims, the two firms are left to squabble over whether losses will be borne by bank shareholders or the taxpayers who bailed out Fannie Mae.

“It seems like a bit of posturing on the part of Bank of America to push back against all repurchase activities,” said Chris Gamaitoni, a mortgage and banking analyst at Washington- based Compass Point. “I don’t think Bank of America is being treated differently than anyone else, and yet they are pretty alone in saying Fannie is being more aggressive.”

The rift widened last year when Fannie Mae told the Charlotte, North Carolina-based company it must repurchase mortgages if an insurer drops coverage, even if the decision is contested. Bank of America refused to comply, pushing Fannie Mae in January to drop the lender as a partner for the funding of new home loans.

Shorter Deadline

Pressure on Bank of America, the second-biggest U.S. lender by assets, may rise in July when Fannie Mae shrinks the amount of time it gives a bank to appeal an insurer’s denial to 30 days from 90 days before pressing for a refund. Repurchase costs probably would rise if the firm is forced to adhere to Fannie Mae’s policy, Bank of America has said.

The lender ultimately may seek a settlement to resolve the mounting requests, said Gamaitoni, a former senior financial analyst at Fannie Mae. Jerry Dubrowski, a spokesman for Bank of America, said Compass Point has regularly overstated the lender’s housing-related liabilities, and declined to comment further.

Insurance Required

Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities for sale to investors. Both firms were seized by the U.S. in 2008 to stave off collapse, and have collectively drawn more than $180 billion in taxpayer funds. The bill is likely to rise — Fannie Mae this week requested $4.6 billion more from the U.S. Treasury Department — and the firms’ regulator is pressing banks for refunds on bad loans to limit the bailout’s cost to the public.

Fannie Mae typically requires a borrower to buy mortgage insurance if the loan exceeds 80 percent of the home’s value. The coverage guards against losses when borrowers default and foreclosure fails to recoup costs.

Mortgage guarantors, including MGIC Investment Corp., Radian Group Inc. and American International Group Inc.’s United Guaranty, have voided policies for errors including inflated appraisals or borrower incomes. Those flaws also would entitle Fannie Mae to demand that banks buy back the loans.

Insurance Disputes

Bank of America is involved in legal disputes with mortgage insurers, including MGIC, saying the firms are denying valid claims. In the second half of last year, Bank of America has “materially increased” the percentage of denials it argues are improper, Milwaukee-based MGIC said this week in a filing. AIG’s mortgage guarantor said last week that lenders were devoting more resources to reversing rejections.

Bank of America has committed about $42 billion to deal with flawed mortgages, foreclosures and writedowns since the start of 2007. The lender accounts for half of Fannie Mae’s pending repurchase demands after insurance denials, the Washington-based firm said this week in an annual filing.

Outstanding repurchase claims against Bank of America from all sources jumped 22 percent to a record $14.3 billion as of Dec. 31, the lender said in January. That increase was fueled in part by other demands from Fannie Mae. The mortgage financing firm has started asking for refunds on loans that have performed for 2 years or more before defaulting, requests Bank of America has deemed invalid.

More Public Money

“We enforce our contract with Bank of America in the same manner as we do with other lenders,” said Kelli Parsons, a spokeswoman for Fannie Mae. The firm is working with the bank to resolve their disagreements and “treats lenders consistently with respect to issuance of repurchases and our expectations of collection.”

Fannie Mae faces its own squeeze and asked for more public funds this week after posting a$2.4 billion loss in the fourth quarter. The company said that while Bank of America has failed to “honor repurchase obligations in a timely manner,” it still expects to get reimbursed.

“If we collect less than the amount we expect from Bank of America, we may be required to seek additional funds from Treasury,” the company said in the Feb. 29 filing.

Fannie Mae said this week that Bank of America accounted for about 60 percent of all repurchase requests that haven’t been resolved in more than four months at year-end. The lender made up $5.5 billion of the U.S.-owned firm’s outstanding repurchase requests. Most of those demands stem from loans created by Countrywide Financial Corp., the biggest U.S. mortgage lender before its 2008 takeover by Bank of America.

JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, had $1.1 billion in requests.Citigroup Inc. (C), No. 3 by assets, had $917 million and No. 4 Wells Fargo & Co. (WFC) had $830 million.

Bank of America’s 46 percent rise in New York trading this year has led lenders higher amid signs the U.S. economy is improving. Moynihan, 52, has said that expenses tied to soured mortgages will subside by about $1 billion a quarter, which combined with other cost-cutting plans should help the firm’s pretax revenue rebound.

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