Monthly Archives: August 2011

Two people from a realty office in Fontana are arrested on fraud charges

Two people from a realty office in Fontana were arrested for allegedly creating dozens of fraudulent documents, according to the San Bernardino County District Attorney's Office.


On Aug. 25, investigators from the D.A.'s Real Estate Fraud Unit served a search warrant at Fidelity Group Realty and Legal Services in Fontana.

The search warrant was the result of an ongoing investigation regarding the fraudulent recording of Substitution of Trustee and Full Reconveyance and Release of Lien documents at the San Bernardino County Recorder's Office.

These documents are normally recorded by a banking institution when a mortgage is paid in full; however, in this case, suspects Stephen Andrew Easterly and Emanuel Percival were allegedly signing as the "authorized representatives" of various banks.
 
Between the two of them, there have been more than 70 fraudulent documents recorded, affecting more than $17 million in home loans, investigators alleged. In addition to filing fraudulent documents, Easterly is also accused of creating fictitious checks and mailing them to the banking institutions, telling victims he is paying off their loans.

Victims in this case were charged between $3,500 and $7,000 for a process they believed would pay off their home loans and save them from foreclosure.

Are the State AG Mortgage Settlement Talks Falling Apart?

By Kate Davidson, American Banker

WASHINGTON — A rare public rebuke of a rogue attorney general by his colleagues has highlighted the dysfunction among the state AGs and raised doubts about their ability to strike a settlement deal with the largest mortgage servicers. Banks are operating under the assumption that New York Attorney General Eric Schneiderman will not sign on to a global settlement — and expect a handful of other state AGs to follow suit — after he was accused of trying to undermine the negotiations and removed from the coalition's executive committee on Aug. 23.

His removal was an attempt to get settlement talks back on track, but many said the damage has already been done. "This confirms the AGs are fundamentally split," Andrew Sandler, a partner with BuckleySandler LLP, said. "With New York and perhaps other significant states not participating, any overall settlement has significantly less value to the banks."

The value is both literal and figurative.

If the settlement does not cover servicing problems in New York — a state particularly hard hit by foreclosures — the settlement amount would likely be much lower.

In turn, if settling is supposed to put the whole foreclosure mess behind the banks, several lawyers asked, what have they really gotten out of it if they still face years of potential litigation with other states?

There is also an increasing risk that the negotiations, which have dragged on for more than a year, are losing momentum, said David Dunn, a partner with the law firm Hogan Lovells.

"Things like Schneiderman pulling out make everyone reconsider their position," Dunn said. "Certainly from the banks' standpoint, a settlement without New York is something everyone is going to have to think twice about. And from the states' perspective, if New York is no longer willing to participate, am I willing to participate?"

The AGs are already exploring scenarios under which New York or others are not party to the settlement, although they won't know the impact of such decisions until an agreement is reached in principal.

For their part, state and federal officials insist that Schneiderman's exit has not derailed negotiations — he was not part of the smaller committee negotiating directly with the servicers — and are still confident that banks see the value in a deal with the majority of states.

"If one state, no matter how big the state is, pulls out of a deal, is that reason to discount the other 49 states?" said one person familiar with the negotiations. "If you do decide, 'Well, no deal,' you run the risk of a raft of litigation. And if you can settle with all but one or all but a small number of states, it may make a lot of sense."

Although they have yet to work out the details, sources on both sides said they are mostly in agreement over new mortgage servicing standards. But the talks have stalled on the issue of future lawsuits — specifically, whether the banks will be released from liability for past servicer-related misconduct.

Schneiderman has launched his own investigations into mortgage securitization, and warned that a narrow release could let the banks off too easily before the full extent of their conduct has been uncovered. AGs from Massachusetts, Delaware and Nevada, have raised similar concerns.

"We will not settle an issue until we know all of the facts and we know all of the damage," Massachusetts Attorney General Martha Coakley said at a press conference earlier this month.

In a statement released Tuesday, Delaware Attorney General Beau Biden said he shared Schneiderman's concerns about the scope of the releases.

"I believe that the events leading up to the mortgage crisis must be fully investigated, including origination and securitization practices, before any broad immunity is granted," Biden said. "The American people deserve an investigation."

Sources on both sides have said the issue is primarily tied to the settlement amount.

Why pay all this money now if they're going to have to pay again later, either through a settlement or in court, banks have asked.

The amount banks pay now could also influence the amount of future settlements or civil penalties, as those plaintiffs will expect to get a similar deal, Dunn said.

"The more you're paying, the more you'd like to be sure you're closing the books," he said. "So I do think the inability to assure closure is an impediment to the banks writing larger checks."

A smaller settlement amount also means less money to be distributed among the states, and each one will have to make their own calculation about whether they're willing to accept less money in exchange for the narrow releases that their colleagues are seeking.

State officials have maintained that there is currently nothing on the table that would impede New York from pursuing securitization cases. Delaying the settlement to fully investigate those claims, however, could take years, and most states are not inclined to do that, either.

"There are some who have kind of set expectations that we are going to address everything under the sun, and we're not," said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who is leading the negotiations on behalf of the 50 states. "We're focused on foreclosure and servicing practices. This is not a case that's focused on investors, it's focused on homeowners."

Some bank lawyers have speculated that if New York, Massachusetts, Delaware and Nevada do not support the final settlement, it puts increased pressure on California and Illinois — two states with significant foreclosure problems — to withdraw as well. If that happens, they said, the deal would collapse.

Others took a less pessimistic view, and expect that a settlement without some of the major players was still possible, and could even provide leverage in future litigation. But they don't expect a resolution anytime soon, despite reports that state officials have set a Labor Day deadline.

Meanwhile, the Office of the Comptroller of the Currency is reviewing action plans required by consent orders issued in April to the top-14 mortgage servicers.

The Justice Department asked the OCC earlier this summer to extend the deadline for the action plans — which would form the basis for broad mortgage servicing standards — to allow coordination with state and federal officials.

There is still a possibility for coordination, but it becomes less likely the longer the negotiations drag on, dampening enthusiasm for a global settlement, sources said.

"The only issue the AGs have really focused on — so-called robo-signing — is yesterday's news," Sandler said. "Real progress is being made pursuant to the consent orders that all of the major servicers entered into with the bank regulators. Given the delay, the right question is whether there is any continuing relevance to the AG process?" 

Obama administration moves to quash state investigations of Wall Street banks

By Andre Damon and Barry Grey

The Obama administration has intervened to support a settlement by banks charged with fraudulent practices in the processing of home foreclosures that would prevent state governments, New York in particular, from carrying out their own investigations of major Wall Street firms.

The New York Times reported Monday that Shaun Donovan, the US secretary of housing and urban development, together with high-ranking Justice Department personnel, has been “waging an intensifying campaign” to persuade Eric T. Schneiderman, the New York attorney general, to drop his opposition to a settlement of the home foreclosure charges.

Under the proposed settlement, major banks including JP Morgan Chase, Wells Fargo, Citigroup and Bank of America, would pay a combined total of $20 billion, which would supposedly go toward home loan modifications and homeowner counseling. In return, bank executives would be shielded from possible civil suits or criminal prosecutions arising from state probes into their role in fueling the sub-prime mortgage bubble, whose collapse triggered the financial meltdown of September 2008.

Schneiderman’s office has opened several inquiries into banking practices during the mortgage boom of the mid-2000s.

Last year it emerged that banks and mortgage companies forged documents and paid employees with no knowledge of the homes in question to sign legal documents that were then used to process foreclosures.

The amount of the settlement of charges arising from these practices—$20 billion—represents a financial wrist-slap for banks that made multiples of this figure from the creation and sale of securities linked to toxic home loans. These banks have continued to reap huge profits from speculative bets in the midst of a global economic crisis of their own making that has destroyed the jobs and living standards of countless millions in the US and around the world. Nevertheless, the banks have resisted paying even this token sum.

$20 billion will barely make a dent in a foreclosure crisis that has already thrown millions of Americans out of their homes. US homeowners collectively owe the banks $753 billion more than the market value of their homes.

Schneiderman has based his opposition to the deal on provisions barring future litigation against the banks. The Times quoted Danny Kanner, a spokesman for Schneiderman, as saying, “The attorney general remains concerned by any attempt at a global settlement that would shut down ongoing investigations of wrongdoing related to the mortgage crisis.”

Schneiderman is only the most prominent of several state attorneys general, including Catherine Cortez Masto of Nevada and Beau Biden of Delaware, who have refused to support the proposed settlement.

In pressuring Schneiderman to drop his opposition to the deal, the Obama administration claims to be motivated by a desire for a quick resolution that would funnel $20 billion in aid to hard-pressed homeowners. “Our view is we have the immediate opportunity to help a huge number of borrowers to stay in their homes, to help their neighborhoods and the housing market,” Donovan told the Times.

A spokeswoman for the Justice Department echoed this line, telling the newspaper, “The Justice Department, along with our federal agency partners and state attorneys general, are committed to... bring relief swiftly because homeowners continue to suffer more each day that these issues are not resolved.”

This pretense of humanitarian concern for the plight of distressed homeowners is utterly cynical and dishonest. Since the mortgage crisis began more than four years ago, the government, first under Bush and then under Obama, has done virtually nothing to help homeowners stay in their homes.

Under Obama, the major cause of mortgage delinquencies and defaults has shifted from predatory loan practices to the impact of prolonged unemployment. But the administration has refused to take any serious steps to halt foreclosures in deference to the banks, which fiercely oppose any measures that would negatively impact their balance sheets or profits.

The White House would have the public believe it a mere coincidence that its newfound urgency in regard to the foreclosure crisis coincides with a campaign by the banks to block legal action against them.

Executives of the major banks are meeting with law enforcement officials Thursday, the Financial Times reported, to continue negotiations over the settlement, which the newspaper said remains several weeks from completion. Representatives of Citigroup, JP Morgan Chase, Wells Fargo and Bank of America have remained in “frequent dialog” with state attorneys general and prosecutors, the newspaper said.

The Times article noted that Schneiderman has also come under criticism from the Obama administration for suing to block a separate deal reached earlier this year that would settle civil actions filed by 22 institutional investors against Bank of America. Investors, including the Federal Reserve Bank of New York, the giant asset managing firm BlackRock, and Pimco, the world’s largest bond fund, sued Bank of American over 530 mortgage-backed securities which the claimants say were sold on the basis of false information.

The deal, brokered by Bank of New York Mellon, would require Bank of America to pay $8.5 billion to the investors holding these securities. Schneiderman intervened to block the settlement on the grounds that the $8.5 billion represents a mere fraction of investors’ losses and that the deal was worked out behind the backs of many holders of the securities.

The Times article reports a recent public altercation between Schneiderman and Kathryn S. Wylde, the chief executive of the Partnership for New York City and a member of the board of the Federal Reserve Bank of New York, which supports the settlement. Speaking to the newspaper about her argument with the attorney general, Wylde gives voice to the attitude of subservience to Wall Street that characterizes the Obama administration and the political establishment as a whole.

“Wall Street is our Main Street—love ‘em or hate ‘em,” she tells the Times. “They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

Evidently, the threshold in official circles for what is “indefensible” is infinitely high when it comes to Wall Street. Under Obama, the federal government has failed to file a single criminal charge against a high-level banker or even bring a civil case to trial in connection with the fraud and lawlessness that pervaded the dealings of the banks during the sub-prime mortgage boom and its catastrophic aftermath.

This is not for lack of evidence. Last April, the Senate Permanent Subcommittee on Investigations released a 650-page report on the financial crisis that provided a detailed factual account of banking fraud as well as the collusion of federal regulatory agencies and the credit rating firms. The report concluded with a list of federal securities statutes that it suggested had been violated by major Wall Street firms.

The Obama administration has ignored this report as part of its efforts to shield the financial elite from being held to account for its actions.

Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

By Richard D. Vetstein, Esq.

Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too

The sophisticated financial minds who wrought the MERS regime sought to simplify the process of repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal courts.–Judge Melvin S. Hoffman, U.S. Bankruptcy Court Judge for Massachusetts, In Re. Schwartz, Aug. 22, 2011

In a case which may raise eyebrows through the Massachusetts real estate and foreclosure industry, a federal bankruptcy court on Monday issued a ruling calling into question the very ability to foreclose upon a MERS-held mortgage. The case is In Re. Schwartz and is embedded below. This blog is the first outlet to be reporting on this very important case.

Debtor Challenges Foreclosure Of Securitized Mortgage

During her bankruptcy proceeding, the debtor, Sima Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She asserted that under the U.S. Bank v. Ibanez decision issued by the Massachusetts Supreme Judicial Court earlier in the year, Deutsche did not own the mortgage on the property when it first started the foreclosure process...

Read Full Article Here

Richard D. Vetstein, Esq.

http://www.massrealestatelawblog.com/2011/08/23/breaking-news-mass-bankruptcy-judge-voids-foreclosure-of-mers-mortgage/

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States’ foreclosure talks with big mortgage servicers stall

Negotiations stumble over how much banks should pay and how much legal immunity from other mortgage-related investigations they will receive.

 By Alejandro Lazo and Nathaniel Popper, Los Angeles Times

An effort by state attorneys general to take big mortgage servicers to task over faulty foreclosure practices has stalled as financial institutions demand broad legal immunity from other mortgage-related probes.


The nationwide effort looking into faulty foreclosures, which involves attorneys general from all 50 states as well as some federal agencies, was expected to have produced a settlement of more than $20 billion by now. But talks have stumbled over how much the banks should pay as well as to what degree they will be released from liability from future investigations.

"The immunity issue is a contentious one, and we are still trying to work through it," said Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller, who is leading the discussions on behalf of state prosecutors.

New York and Delaware have agreed to work together to pursue a wider-ranging probe into Wall Street's role in the mortgage meltdown. California Atty. Gen. Kamala D. Harris is also considering joining that effort, and has said publicly she is interested in pursuing investigations that involve the packaging, securitizing and selling of risky mortgages. Massachusetts Atty. Gen. Martha Coakley has also said she is interested in pursuing separate investigations into mortgage-securitization practices.

Those probes are unlikely to move forward if the 50-state talks result in broad legal immunity for mortgage servicers. The five largest institutions involved — Bank of America Corp.JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. — are pushing the states' attorneys for broad release.

"We continue to believe that the best way to get the housing market going again in every state is a global settlement that addresses these issues fairly, comprehensively and with finality," BofA spokesman Lawrence Grayson said Monday. The other four financial institutions declined to comment.

As the talks have stalled, the Obama administration has waged a campaign to pressure New York Atty. Gen. Eric Schneiderman, leaning on his supporters to urge him to back a broad deal that would grant immunity to the nation's five largest mortgage servicers, a person familiar with the discussions said. But Schneiderman has remained resolute that his own investigations must be allowed to go forward.

"The attorney general remains concerned by any settlement agreement that would fail to provide homeowners meaningful relief to stay in their homes, allow the housing market to begin to recover and get our economy moving again," said Danny Kanner, a spokesman for Schneiderman. "While our federal and state counterparts may be working toward the same goals, ongoing investigations by attorneys general cannot be shut down by efforts to settle quickly and those responsible must be held accountable."

New York and Delaware have more than a dozen attorneys working full time on their effort. They have subpoenaed or requested information from 13 financial firms, including Goldman Sachs Group Inc. and JPMorgan Chase. Harris would be a key addition to the investigation because California was the location of a vast number of the mortgages and foreclosures that fed into the crisis. She met with Schneiderman in San Francisco last month to discuss participating in the probe.

Harris is weighing whether she would sign on to the 50-state settlement if it gave banks immunity. The main consideration is how much money would go to California homeowners, according to a person familiar with her thinking.

In May, Harris announced the creation of a 25-person task force to look at mortgage fraud. This month she subpoenaed Citigroup and its banking subsidiary, Citibank, ordering the two entities to answer questions regarding the selling and marketing of mortgage-backed securities in the Golden State.

alejandro.lazo@latimes.com

NY Attorney General Facing Intense Pressure From Obama Administration On Bank Foreclosure Fraud Deal

By Gretchen Morgenson

Eric T. Schneiderman, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal.

In recent weeks, Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks.

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

But Mr. Donovan and others in the administration have been contacting not only Mr. Schneiderman but his allies, including consumer groups and advocates for borrowers, seeking help to secure the attorney general’s participation in the deal, these people said. One recipient described the calls from Mr. Donovan, but asked not to be identified for fear of retaliation.

Not surprising, the large banks, which are eager to reach a settlement, have grown increasingly frustrated with Mr. Schneiderman.  Bank officials recently discussed asking Mr. Donovan for help in changing the attorney general’s mind, according to a person briefed on those talks.

In an interview on Friday, Mr. Donovan defended his discussions with the attorney general, saying they were motivated by a desire to speed up help for troubled homeowners. But he said he had not spoken to bank officials or their representatives about trying to persuade Mr. Schneiderman to get on board with the deal.

“Eric and I agree on a tremendous amount here,” Mr. Donovan said. “The disagreement is around whether we should wait to settle and resolve the issues around the servicing practices for him — and potentially other A.G.’s and other federal agencies — to complete investigations on the securitization side. He might argue that he has more leverage that way, but our view is we have the immediate opportunity to help a huge number of borrowers to stay in their homes, to help their neighborhoods and the housing market.”

And Alisa Finelli, a spokeswoman for the Justice Department. said: “The Justice Department, along with our federal agency partners and state attorneys general, are committed to achieving a resolution that will hold servicers accountable for the harm they have done consumers and bring billions of dollars of relief to struggling homeowners — and bring relief swiftly because homeowners continue to suffer more each day that these issues are not resolved.”

Terms of the possible settlement under consideration center on foreclosure improprieties like so-called robo-signing and submitting apparently forged documents to the courts to speed up the process of removing troubled borrowers from homes. Negotiations on this deal have been led by Thomas J. Perrelli, associate attorney general of the United States, and Tom Miller, the attorney general of Iowa.

An initial term sheet outlining a possible settlement emerged in March, with institutions including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo being asked to pay about $20 billion that would go toward loan modifications and possibly counseling for homeowners.

In exchange, the attorneys general participating in the deal would have agreed to sign broad releases preventing them from bringing further litigation on matters relating to the improper bank practices.

The banks balked at the $20 billion figure. And the talks seemed to stall over the summer, as Mr. Schneiderman and a few other attorneys general — Beau Biden of Delaware and Catherine Cortez Masto of Nevada, for example — questioned aspects of the deal.

Mr. Schneiderman began objecting a few months ago to the proposed releases barring future litigation, declining to participate as long as they were included.

“The attorney general remains concerned by any attempt at a global settlement that would shut down ongoing investigations of wrongdoing related to the mortgage crisis,” said Danny Kanner, the spokesman for Mr. Schneiderman. His office has opened several inquiries into mortgage practices during the credit boom.

Representatives for the four big banks declined to comment.

Mr. Schneiderman has also come under criticism for objecting to a settlement proposed by Bank of New York Mellon and Bank of America that would cover 530 mortgage-backed securities containing Countrywide Financial loans that investors say were mischaracterized when they were sold.

The deal would require Bank of America to pay $8.5 billion to investors holding the securities; the unpaid principal amount of the mortgages remaining in the pools totals $174 billion. Lawyers representing 22 institutional investors, including the Federal Reserve Bank of New York, BlackRock and Pimco, contended that the deal was favorable.

This month, Mr. Schneiderman sued to block that deal, which had been negotiated by Bank of New York Mellon as trustee for the holders of the securities. The lawsuit contends that the deal could “compromise investors’ claims in exchange for a payment representing a fraction of the losses” experienced by investors and that it had been negotiated without the knowledge of all of the holders of the securities.

The lawsuit angered Bank of New York Mellon, and as Mr. Schneiderman was leaving the memorial service last week for Hugh Carey, the former New York governor who died Aug. 7, an attendee said Mr. Schneiderman became embroiled in a contentious conversation with Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York who represents the public. Ms. Wylde, who has criticized Mr. Schneiderman for bringing the lawsuit, is also chief executive of the Partnership for New York City. The New York Fed has supported the proposed $8.5 billion settlement.

Other investors in the Countrywide mortgage pools who were not part of the settlement talks between Bank of New York Mellon and Bank of America have called the terms inadequate.

Characterizing her conversation with Mr. Schneiderman that day as “not unpleasant,” Ms. Wylde said in an interview on Thursday that she had told the attorney general “it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

Mr. Schneiderman declined to comment on the encounter.

Mr. Schneiderman has opened an investigation into Wall Street’s mortgage machinery, especially examining whether loan documents were provided to the trusts as required under securitization contracts.

Quiet title proves successful for foreclosure consumers

by Patrick Wilkins

Far too often, Pro Se litigants and Legal Professionals alike, suffer severe setbacks and losses due to improper preparation, research, and understanding of the facts, while demonstrating an even greater inability to master the structure and tact needed to evidence a claim. There are several reasons for these gaping mistakes that are felt nationwide. The fact still remains however, that regardless of structure and tact, foreclosure fraud is fraud; and fraud on a consumer is fraud on the judicial and non judicial court system.  According to ForeclosureFraudExposed.com, if a consumer takes time to properly survey stop foreclosure fraud victories across the country, the unanimous conclusion will be that the majority of victories have been won on the offense. Quiet Title is no different. Quiet Titles clear specific issues such as broken chains of titles on home loans and serve a primary purpose of eliminating any and all clouds, thus allowing the property to be free of all liens. The benefit of this offensive maneuvering is that the true and only party left after the dust settles is the consumer.

Quiet title is a course of action brought into a court with authority to hear land disputes to establish a person's claim or title to a particular piece of property, against anyone and everyone who might have any encumbrances, liens or claims thereto. This legal action seeks the court to go into an arrangement wherein the Judge will approve the Final Judgment that proclaims the entitlement rights of the parties involve relative to a specific piece of real property. This same Judgment is recorded in the title registry as well as in the civil court clerk's office.

An action to quiet title is resorted to when there are various individuals or parties claiming conflicting rights to the same piece of property. To settle the allegations and quiet all other false claims thereto, this impartial legal action is brought to court to resolve as to the title of such a parcel of land in question. The court resorts to a quiet title action to prevent multiplicity of cases for all claimants and interested parties to one such specific property.

The one who files the lawsuit is thereby called the Plaintiff. Said person can either be the owner of the property or another lien-holder who deems that other title encumbrances are mediocre or null compared to the one they are holding, or is defective in a sense. Other grounds for the filing of an action to a quiet title may originate from the following grounds, adverse possession where the new owner take legal action to get hold of the title in his own name; Torrens title registration, an act which ceases all unrecorded assertions; fraudulent passage of a property, possibly by coercion or falsified deed. In all cases of such a legal action, the Plaintiff should prove to the court that his claim to the specific property in question excelled that of other claims. He may further argue, through his attorney that his title is not impeded by the lien that appears in the title registry thru a deed of trust or mortgage deed.

For instance, there is a recorded lien in the title registry of the property you have a title to, in favor of another party, i.e. Mr. Y. The plaintiff must prove that since there was no money payable to Mr. Y, then no obligation therefore exists.

BofA Loan Risk May Rise $9 Billion If Judge Sides With MBIA

By Jody Shenn and Shannon D. Harrington

Aug. 18 (Bloomberg) -- Bank of America Corp. may face billions of dollars more in liability for faulty mortgages if a judge agrees with insurer MBIA Inc. that the lender must buy back loans even if the errors didn’t cause a borrower’s default.

If New York Supreme Court Justice Eileen Bransten and judges in similar cases across the country rule that the issue of “causation” doesn’t apply -- meaning it’s enough to show that the loan was improperly made -- it “could significantly impact” Bank of America’s potential costs, the bank said in a regulatory filing this month.

Such court defeats may add as much as $9 billion to what Bank of America owes bond insurers, according to hedge fund Branch Hill Capital, which is betting against its stock and has invested in MBIA. A victory for Armonk, New York-based MBIA may also strengthen claims by mortgage-securities investors that want the Charlotte, North Carolina-based bank to pay more than the $8.5 billion it’s offered them as a settlement.

“You don’t have to wait until you’re in a severe accident before you return the car with bad brakes,” said David Grais, a partner in New York at Grais & Ellsworth LLP who represents investors objecting to the bank’s proposed settlement with Countrywide Financial Corp. mortgage-bond holders.

Hearing Today

Any ruling on the issue, which was to be the subject of a hearing today in state court in Manhattan, may come later than anticipated because the proceeding was postponed until October. The decision may intensify settlement talks between bond insurers like MBIA and other banks that issued securities based on faulty mortgages, according to the head of insurer Assured Guaranty Ltd., which is demanding money from lenders including UBS AG and Credit Suisse Group AG.

“If they lose that case, then our certainty of getting reimbursed becomes a lot higher,” Dominic Frederico, Assured’s chief executive officer, said in an interview. Bank of America agreed in April to a deal it valued at $1.6 billion with Hamilton, Bermuda-based Assured to settle its mortgage claims.

Since the start of 2010, Bank of America’s cushion for future losses on repurchases of mortgages that never matched their promised quality has ballooned from $4 billion to $17.8 billion even as it made payments in settlements with debt guarantors such as Fannie Mae and Freddie Mac, the government- supported mortgage giants.

Bond Settlement

The bank set aside $14 billion last quarter to cover claims, including the proposed $8.5 billion for the Countrywide- bond settlement reached in June with investors including BlackRock Inc., the Federal Reserve Bank of New York and Pacific Investment Management Co. The deal is being challenged by other bondholders and attorneys general in New York and Delaware.

Its reserves and guidance on how much more it may need are based on several assumptions, though, including the company’s view that losses will only have to be reimbursed if it can be proven “that the alleged representations and warranties breach was the cause of the loss,” the bank said in the Aug. 4 filing with the Securities and Exchange Commission. If courts disagree, “it could significantly impact” the estimate of as much as $5 billion in additional liabilities.

“It could change the playing field,” MBIA Chief Executive Officer Jay Brown said on an Aug. 10 conference call with analysts and investors when asked about the causation issue. It could “have a very significant effect on the ability to rescind or obtain rescissionary damages,” he said. “So, it can affect the view of both parties as to the likely outcome of the trial.”

‘Wrong Now’

Lawrence Grayson, a spokesman for Bank of America, said in an e-mail that Branch Hill Capital “consistently has overstated Bank of America’s representation and warranty repurchase exposure.”

“Their motives are not nuanced,” he said. “Less than a year ago, they had estimated repurchase losses for Bank of America of approximately $74 billion. They were wrong then, and we believe that they are wrong now.”

The company has provisions for all exposure that “currently is probable and reasonably estimable,” he said.

In December, Bransten denied Bank of America’s bid to prevent MBIA from using reviews of samples of loans in the case, rather than requiring reviews of every individual mortgage in dispute. The ruling may add to the threats facing Bank of America by encouraging suits, according to the SEC filing.

‘Resources to Deploy’

Bank of America Vice Chairman Charles H. Noski said on an October conference call that the bank had the “resources to deploy” in “defending the interests of our shareholders” through loan-by-loan fights. On the same call, he sought to reassure investors that its losses would be minimized by contract language specifying when the lender would be required to repurchase faulty loans.

“Many of the losses observed in these deals have been, and continue to be, driven by external factors, like the substantial depreciation in home prices, persistently high unemployment and other economic trends, diminishing the likelihood that any loan defect, assuming one exists at all, was the cause of the loan’s default,” said Noski, then the bank’s chief financial officer.

Countrywide, the top-ranked mortgage lender acquired by Bank of America in 2008, agreed to buy back loans when a misrepresentation on loan documents “materially and adversely affects the interests of the noteholders or the note-insurer in those mortgage loans,” according to a prospectus for one of the 2006 deals involved in the MBIA case.

Merrill Lynch

Merrill Lynch & Co., which Bank of America bought at the beginning of 2009, promised loan repurchases when a misstatement “adversely and materially affects the value of the related mortgage loan, prepayment charges or the interests of the certificate holders,” according to a 2006 bond agreement.

Only a handful of cases, almost all involving commercial properties, have dealt with what such language means for breach- of-contract claims. In those cases, courts reached decisions with differing implications, said John Doherty, a lawyer in New York with Atlanta-based Alston & Bird LLP.

Doherty, whose firm’s clients include Bank of America, said both sides in loan-repurchase fights have reason to believe they are right on whether proof of loss causation is necessary. Contracts citing “the interests of noteholders” may be better for debt sellers than those referencing the “value” of loans, he said.

Loan Worth

Both types of language should be read as referencing whether the loans would have been worth as much at the time of the bond deal, if properly described, according to lawyers including Grais, whose clients include Federal Home Loan Banks and anonymous investors objecting to the Countrywide settlement.

In thinking about whether a misrepresentation led to a default, courts may consider the fact that without faulty data, “the loan wouldn’t have closed, or maybe would have closed but at a smaller loan amount and thus a lesser loss” said Richard Barrent, president of Urbandale, Iowa-based Barrent Group, which reviews defaulted mortgages for bondholders and insurers.

Mortgage-seller lawyers point to a case in federal court in Dayton, Ohio, involving commercial-mortgage securities, Wells Fargo & Co. and Bank of America’s LaSalle Bank unit.

In a 2009 order, the court said “the fact that an investor might have made a different decision had he or she had different information may make that information material to the investor’s decision, but it does not make the omission of that information cause a material and adverse effect on the loan.”

‘Shake Out’

Doherty said “when you start to have some uniformity in court decisions on these points, you’re going to see how these things shake out.”

Bank of America shares have declined 44 percent this year through yesterday, leaving the stock 63 percent below its stated book value amid investor concern that the lender’s mortgage liabilities will continue to mount. Its shares fell 45 cents, or 6 percent, to $7.01 at 4 p.m. in New York Stock Exchange composite trading.

The cost to protect against a default by the bank soared this month as investors flocked to credit-default swaps to guard against market losses on the lenders’ debt. Five-year swaps on Bank of America climbed to as high as 370 basis points last week and traded at 330 basis points as of 3:57 p.m. today in New York, according to prices from broker Phoenix Partners Group. The contracts are up from 177.5 basis points at the end of July.

BofA Swaps

Bank of America swaps last week reached the widest-ever compared with peers including JPMorgan Chase & Co. and Citigroup Inc. The average credit swap for the six biggest U.S. banks was 190.5 basis points yesterday, according to data provider CMA.

Bank of America needs to set aside between $10.6 billion and $44.4 billion more to cover losses on soured mortgages sold to or insured by others, said Chris Gamaitoni, a Compass Point Research and Trading LLC analyst.

MBIA’s lawyers at Quinn Emanuel Urquhart & Sullivan LLP are also arguing that insurance law should allow it to win against Bank of America on breach-of-contract and fraud claims without proving causation.

The causation issue alone may add $8 billion to $9 billion of liabilities from bond insurers, said Manal Mehta, a partner at Branch Hill Capital in San Francisco.

“That is probably as important as the statistical sampling ruling,” Mehta said. “It would take away one of Countrywide’s key defenses and significantly accelerate the timetable for litigation.”

Hard to Assess

Bank of America’s ultimate liability is difficult to assess because the matter is likely to be settled, said Jonathan Hatcher, a credit strategist at Jefferies Group Inc. who covers financial companies.

Bank of America is among lenders suing MBIA to overturn a 2009 split of the insurer that the bank said left the unit guaranteeing mortgage bonds insolvent.

“The whole thing is literally a negotiation,” Hatcher said of the multiple threads of litigation. “That makes it difficult to assess what the number would be.”

Bank of America, in its talks with 22 of the world’s largest debt investors, argued that any loan repurchase would require loss causation be proven, according to a filing in New York state court of an expert opinion by Brian Lin, a managing director at RRMS Advisors. Those negotiations led to the proposed $8.5 billion settlement.

Lin said a settlement between $8.8 billion and $11 billion would be reasonable, relying in part on an assumption that investors would be successful in getting Bank of America to repurchase only 40 percent of misrepresented loans. The investor group had argued that they thought a success rate of 50 percent to 75 percent was more reasonable, according to his opinion filing.

BNY Mellon

Lin was hired by Bank of New York Mellon Corp., the bonds’ trustee that is seeking approval for the accord, to provide the assessment, in which he said he didn’t take into consideration Bank of America’s views on causation in his calculation. He declined to comment.

If a loan was missing title insurance, it’d make no sense to say that it shouldn’t be repurchased because a borrower defaulted after losing his job, said Jonathan C. Wishnia, a lawyer at Lowenstein Sandler PC in Roseland, New Jersey, who represents investment firms and loan servicers. The foreclosure loss could be larger even if not caused by the mistake, he said.

Wishnia added that the outcome of the litigation may still depend on the details of the contracts -- and how those may be interpreted by the courts is unclear because such cases usually settle out of court.

“That’s historical model, these things didn’t get litigated that often,” he said.

The case is MBIA Insurance v. Countrywide Home Loans, 602825-08, New York State Supreme Court (New York County).

--Editors: Peter Blumberg, Andrew Dunn

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net and; Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Andrew Dunn at adunn8@bloomberg.net.

 

Lawyers accused of scam in bank suits

By JACOB ADELMAN
Associated Press

COSTA MESA, Calif. (AP) -- California prosecutors sued several lawyers and call center operators for allegedly duping desperate homeowners across the country into paying thousands of dollars to join dubious lawsuits against big banks.

The complaint unsealed Thursday in Los Angeles County Superior Court accuses prominent foreclosure attorneys Philip Kramer and Mitchell Stein and at least 17 other individuals and businesses of ensnaring borrowers in a scheme that falsely promised a cut of future settlements.

The lawsuit portrays the defendants as the most recent in the chain of mortgage-related scammers who helped fuel the housing bubble and have cashed in on its collapse. The defendants previously worked in the fraud-ridden loan modification industry, in which lawyers offer to negotiate better mortgage terms on behalf of troubled borrowers in exchange for a fee.

They are accused of telling borrowers that they had a solid claim to being victims of predatory lending because courts had already found most lenders to have approved inappropriate mortgages.

"They essentially took advantage of what we know is a growing sentiment out there," California Attorney General Kamala Harris said Thursday. "They suggested that by joining this lawsuit, the banks would have to pay. But the only people who paid were those homeowners who were victimized for the second time."

Investigators are aware of some 2,500 California residents who have been listed as defendants in the lawsuits, but there could be many more who paid fees and were never actually added to the suits or are out of the state, Harris said.

Up to 2 million official-looking mailers advertising the lawsuits were sent to homes in at least 16 other states, including Arizona, Florida, Nevada, New York and New Jersey, Harris' office said in a release.

Some borrowers had their homes foreclosed on after paying to join the suits filed by Kramer and Stein, according to the complaint.

Defendants in the complaint are all based in California, but the investigation could eventually ensnare associates in other parts of the country.

Florida bar spokeswoman Zannah Lyle confirmed that her organization was looking into allegations of rule violations concerning Tallahassee-based lawyer and lobbyist David Ramba's work with Kramer to recruit struggling homeowners to join lawsuits against banks. Ramba did not immediately respond to a message seeking comment.

The attorney general's complaint was unsealed a day after state bar investigators and state Department of Justice agents served defendants with copies of the complaint at 14 locations in Los Angeles and Orange counties.

Officials loaded boxes of seized documents into moving vans Wednesday. Armed police guarded the entrances to emptied offices, which appeared to contain wall-to-wall cubicles for phone center workers. The Orange County raids took place in sprawling office parks with manicured lawns surrounding Irvine's airport.

Outside one office, a man in a business suit said he had worked for the raided company but refused to answer any other questions as he carried a stack of framed pictures from the building and oversaw the removal of a small refrigerator by younger apparent employees.

At another office, a manager who would only give his first name, David, said he and his colleagues had been questioned about their connection with Kramer. He said they had done business with the lawyer two years ago but not since.

Prosecutors accuse the defendants of making false representations and three counts of unfair competition. They are seeking an injunction stopping the defendants from continuing with the business in addition to unspecified monetary damages.

No criminal charges have been filed in connection with the case.

Kramer's firm and the other defendants' were placed into receivership on Monday and have had their assets seized, the attorney general's office said.

Harris said that bar association lawyers were reviewing the suits against the banks to determine whether any plaintiffs had legitimate complaints that could be pursued against the lenders.

Calls to Kramer's office were being forwarded to a state bar phone number Thursday. Calls to Stein, who refers to himself on his firm's website and other communications as "The Doberman," went straight to a busy signal.

Prosecutors accuse Kramer and Stein of exploiting an existing lawsuit known as Ronald v. Bank of America NA filed in Los Angeles Superior Court in March 2009. Stein was one of the lawyers who first filed that case, which alleged on behalf of a few dozen clients that the bank committed mortgage-related improprieties. Kramer later joined as counsel to another defendant who was added to the case.

The lawyers used the Ronald case to drum up business and have since filed separate lawsuits against JPMorgan Chase & Co, Wells Fargo Bank NA, Citibank NA and others to broaden their base of clients, the complaint alleges.

The lawyers and their associates sent mailers that looked like official class-action lawsuit notifications and stated that their recipients were potential plaintiffs in a litigation settlement. The letters claimed they could cut their mortgage to as little as 70 percent of their value, prevent foreclosure and get $75,000 in damages.

They directed people to phone supposed law offices that were actually call centers staffed by operators with no legal expertise.

In addition to using mailers, Stein used his law firm's Facebook page to make overblown claims about bank behavior and his ability to seek retribution, according to the complaint.

"Look for Patriot Act violations in your mortgage," Stein wrote in a Jan. 17 posting. "Talk to a lawyer. You might just cancel the mortgage."

Prosecutors estimated hundreds or even thousands of people paid between $5,000 and $10,000 to join the lawyers' suits.

Kramer gloated in an October 2010 e-mail to another defendant about the virtues of their new undertaking compared with the loan modification business.

"Only morons would prefer to `sell' mods from this day forward," Kramer wrote, according the complaint.

Bank records show more than $7 million deposited in three of Kramer's accounts connected to the investigation, with millions more paid to call centers that provided answers to prospective clients responding to the mailers, the complaint said.

Those workers are accused in the complaint of overstating lawyers' progress in the lawsuits, all of which are in their earliest stages, and of misrepresenting judges' apparent disposition toward the banks.

Some salespeople are alleged to have told borrowers that the judge in the Ronald v. Bank of America has told the lender it has "no defense" and that its main argument is "absurd."

The salespeople also tell homeowners that the case's lawyers have proven banks have taken money from investors that can't be accounted for, the complaint says.

Philip Warmanen, a 71-year-old travel agent in Jacksonville, Fla., was among those who joined the lawsuit. Warmanen said he responded to a mailer that turned out to be from Kramer's law firm early this year after Bank of America failed to offer him a modification on his home that had lost about half its value since he paid $525,000 for it in 2006.

Warmanen was told he should receive a modification and other settlement benefits in just a couple months when he paid $4,000 to join the lawsuit but has heard little of the case since then.

Jacob Adelman can be reached at http://twitter.com/jacobadelman

MERS Foreclosure Case to Get Supreme Court Review

San Diego-based foreclosure attorney Ehud Gersten has filed a formal petition with the U.S. Supreme Court seeking an expedited review of "Gomes vs. Countrywide," a decision that gave Mortgage Electronic Registration Systems (MERS) the right to foreclose on San Diego homeowner Jose Gomes without allowing Gomes to question if Countrywide actually held the note on his house.

“This will be the first case in the country to petition the nation’s highest court regarding the foreclosure fraud that has taken place, though its emphasis will be specifically on California law," said Gersten, attorney for Jose Gomes. "The larger picture is the practices and procedures of the largest banks in the country and MERS, the system the banks set up nationally to track the millions of mortgage loans."

In February, the Fourth Appellate District Court of California upheld the rights of MERS to the deed of trust, giving MERS the right to foreclose. The decision, in effect, denies vulnerable homeowners the right to question the foreclosure process. In addition to Gomes vs. Countrywide, rcourts in various jurisdictions nationwide, including Massachusetts, Florida, Arkansas, Missouri, New York, Arizona, Texas and Nebraska have taken stands to protect the rights of homeowners.

“A home is the biggest purchase most Americans will ever make,” Gersten said. “It's an important piece of the American Dream and with foreclosure fraud rampant across the country right now, California homeowners deserve to know that the courts will protect them from ill-reputable and negligent banks engaged in sloppy or downright illegal foreclosure proceedings. We always said we would go to the nation's highest court for justice if we had to and that's where we are.”