Lawsuits like this one have been on the rise as ever more mortgages default. It is no secret that the housing market boom fostered poorly underwritten mortgages, in which it was common that a borrower’s income was inflated or never documented. Insurers are denying the claims on many loans, asserting they are not liable to pay claims because, they allege, the loans were originated fraudulently.
It would be funny if it wasn’t so damned serious. The ankle-biters are proving the borrower’s case that the loans were fraudulently procured. And they are making the case for borrower’s rescission under TILA. The “rescission” remedy that insurance companies are so fond of is now being used by Big Insurance against Big Banks.
You might remember during the health care debate this came out when the heads of each major health insurer were asked by a congressional panel if they would pledge to give up rescission, they said no. That’s because rescission is their ace in the hole.
If they don’t like the claim they rescind the policy and give you back your premiums. That’s it. Meanwhile you checked into the hospital expecting an operation that costs say, half a million dollars, and now you find out you are either going to die or you have to come up with the half million bucks yourself.
That’s the situation here. The Insurance company comes up with some erroneous statement of fact on which they can hang their rescission hat. Like in health care where they suddenly find that you didn’t disclose a pre-existing condition that you didn’t know you had. Here they are saying that they won’t pay off on the mortgage loans because the loans were bad to begin with and that they were deceived by the failure to disclose the absence of underwriting standards being applied.
Let’s see. You have insurance companies issuing policies for more than they could ever pay and the insured party is the one who committed fraud? AIG, Republic and the rest of them were as complicit in this financial tragedy as anyone else. Believe me, if a guy like me sitting in retirement in Arizona was able to figure it out then any of these financial knuckleheads could have done the same and most assuredly looked the other way when the figures didn’t add up — except for the figures used to compute their bonuses.
Mortgage Insurer Asks Court to Bless Claim Denials
Insurance Networking News, February 16, 2010
Sara Lepro
The game of hot potato between lenders and mortgage insurers continues.
The mortgage insurance unit of Old Republic International Corp. is asking a court to back its refusal to pay claims on soured mortgages originated by Countrywide Financial Corp.
In a suit filed Dec. 31 in New York State Supreme Court, Republic Mortgage Insurance Co. said it has discovered more than 1,500 delinquent Countrywide loans with “material misrepresentations … , in some cases by Countrywide or with its knowing participation.”
Republic said that, because Countrywide, now a unit of Bank of America Corp., disputes the insurer’s investigation and its refusal to pay the claims, it is seeking a declaratory judgment that its procedures were consistent with the law and are not a basis for the lender to challenge the rescissions, or policy cancellations.
Old Republic disclosed the suit in a Securities and Exchange Commission filing Feb. 5.
Lawsuits like this one have been on the rise as ever more mortgages default. It is no secret that the housing market boom fostered poorly underwritten mortgages, in which it was common that a borrower’s income was inflated or never documented. Insurers are denying the claims on many loans, asserting they are not liable to pay claims because, they allege, the loans were originated fraudulently.
Moody’s Investors Service Inc. has estimated that in recent quarters private mortgage insurers have rejected about 25% of claims, up from a historical average of about 7%.
In another recent case, Bank of America sued MGIC Investment Corp. over its rescission practices. B of A has also stopped sending new business to the Milwaukee insurer.
What is different about the Republic case is that the insurer is being proactive in seeking validation of its rescission practices.
“Some courts are better than others for insurers, and they wanted to make sure Countrywide didn’t jump them,” said David Goodwin, a partner in the policyholder insurance practice at Covington & Burling LLP in San Francisco. Goodwin is not involved in the Republic case.
Neither Republic nor B of A would discuss the suit. (The lender is trying to get the case moved to arbitration.)
However, Al Zucaro, the chairman and chief executive officer of Old Republic, the Chicago parent of Republic Mortgage Insurance, said that, with the increasing volume of rescissions, it is natural for the number of disagreements between lenders and insurers to rise.
“There’ve always been rescissions in the business,” he said. “They’ve just not in the past been at the same high level as they seem to be currently.”
Fannie Mae and Freddie Mac, which buy most of the loans covered by private mortgage insurers, compound the problem by forcing lenders to buy back a lot of these loans, he said.
“Fannie Mae and Freddie Mac themselves have been rescinding a lot of loans as well,” he said. “So whenever that happens, it creates obvious pressures and stresses in the system.”
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