January 25, 2011 by Leave a comment

Recently I’ve discussed the many lawsuits that borrowers are bringing against lenders for alleged wrongful foreclosures.  Lawsuits in Massachusetts, Utah, Maryland, New York, and Massachusetts again are putting lots of pressure on lenders in the ongoing robo-signing foreclosure mess.

Now we are starting to see lawsuits from investors in mortgage-backed securities, who are understandably upset that their AAA-rated safe mortgage backed securities turned out to be, well,  not-so-safe.  MBIA, TIAA-CREF, New York Life, Dexia Holding, and other major investors are filing suit against Bank of America’s Countrywide Financial (which was acquired by Bank of America in 2008 for $4 billion).  The investors allege that Countrywide committed “massive fraud” when it sold the group hundreds of millions of dollars worth of bad mortgage backed securities.  This could be really bad news for B of A and other big lenders. From the complaint:

“This action concerns a massive fraud perpetrated by Defendant Countrywide Financial and certain of its officers and affiliates against the Plaintiffs, which are investors in mortgage-backed securities (MBS) issued by Countrywides subsidiaries. The Plaintiffs are institutional investors that wanted conservative, low-risk investments and thus bought Countrywide MBS (the Certificates) that were represented to be backed by mortgages issued pursuant to specific underwriting guidelines and rated investment-grade (primarily AAA). In purchasing the Certificates, the Plaintiffs and their investment managers relied on term sheets, prospectuses and other materials prepared by and provided to them by the Defendants, which made representations about the Countrywide Defendants purportedly conservative mortgage underwriting standards, the appraisals of the mortgaged properties, the mortgages loan-to-value (LTV) ratios, and other facts that were material to Plaintiffs investment decisions. Plaintiffs and their investment managers also relied on Defendants public statements concerning the Countrywide Defendants adherence to prudent underwriting guidelines and careful credit analysis. These representations by Defendants were recklessly or knowingly false when made. In reality, Countrywide was an enterprise driven by only one purpose to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide Defendants, without regard to the investors that relied on the critical, false information provided to them with respect to the related Certificates.”

Also of interest to me:

“In carrying out its review of the approximately 19,000 Countrywide loan files, MBIA found that 91% of the defaulted or delinquent loans in those securitizations contained material deviations from Countrywide’s underwriting guidelines.”

I’m not entirely clear on what the legal threshold for proving fraud is, but I believe that the hardest parts to prove are that the person committing the fraud had knowledge of the misrepresentation and intent to defraud.  That said, 91% of the defaulted loans had problems with documentation and/or underwriting.  That is an awfully high percentage.  Just saying.

Another point of interest is that investors are alleging that “Countrywide failed to ensure that title to the underlying loans was effectively transferred”:

“Countrywide routinely failed to comply with the requirements of applicable state laws and the PSAs for valid transfers of the notes and security instruments to the issuing trusts”.

This ties in with some of the other lawsuits that we have seen from the borrower side.  Many foreclosures that have been overturned, such as in the Ibanez case in Massachusetts, were because it was found that the foreclosing party did not have the standing to foreclose because the note hadn’t been properly transferred.  I suspect this is the first of many similar lawsuits.  The too-big-to-fail banks are under pressure from all sides, and it will be interesting to see how this plays out.

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