At Least 102 Fraudulent Mortgage Bailouts Lands Chicago Lawyer in Jail

First appeared in FBI: Chicago Division

A former Chicago lawyer was sentenced to 15 years in federal prison for engaging in mortgage and bankruptcy fraud schemes involving a so-called “mortgage bailout” program that purported to “rescue” financially distressed homeowners but instead tricked victims into relinquishing title to their homes and declaring bankruptcy. The defendant, Norton Helton, participated in at least 102 fraudulent mortgage bailout transactions and more than a dozen fraudulent bankruptcies in 2004 and 2005. He was ordered to pay more than $3.2 million in mandatory restitution to various lenders and financial institutions that were not repaid by the borrowers or fully recovered through subsequent foreclosure sales, federal law enforcement officials announced today.

Helton, 50, of Atlanta and formerly of Chicago, was sentenced Wednesday by U.S. District Judge Samuel Der-Yeghiayan in federal court in Chicago. He was ordered to begin serving his sentence in June.

Helton and two co-defendants, Charles White and Felicia Ford, were convicted of multiple fraud counts following a five-week trial in June and July 2010. White, 43, of Chicago, was sentenced late last year to more than 22 years in prison, while Ford, 39, of Chicago, is awaiting sentencing next month.

White owned and operated Eyes Have Not Seen (EHNS), which purported to offer insolvent homeowners mortgage bailout services that would prevent them from losing their homes in foreclosure by selling their property to third-party investors for whom the defendants fraudulently obtained mortgage financing. The victim-clients were assured they could continue living in their homes rent and mortgage-free for a year while they attempted to eliminate their debt and repair their credit. EHNS misled clients concerning the operation of the purported program. In particular, victim-clients were not told that their homes were, in fact, being sold to third parties and that ENHS would strip their homes of any available equity at the time of sale, which EHNS did. Instead, ENHS clients were told that they were only temporarily transferring their homes and would preserve their ownership rights.

Helton was recruited by White to represent ENHS participants at the real estate transactions it orchestrated. The victim-clients typically met Helton for the first time at the closings at which they sold their homes. Helton worked to placate individuals who questioned the program and to dissuade them from retaining independent legal advice. He received above-market legal fees for appearing at closings at which he did little more than guide victim-clients through the paperwork that sold their homes with EHNS receiving all of the profits from the sale. Helton further used the ENHS real estate closings to recruit prospective bankruptcy clients, informing them that bankruptcy would serve as a component of the bailout program. Helton subsequently filed more than a dozen bankruptcy petitions for victim-clients that omitted any reference to their recent EHNS property sales.

In addition to participating in ENHS’s bailout program, Helton attempted to implement his own mortgage bailout program through Diamond Management of Chicago, Inc., a foreclosure avoidance company comparable to EHNS. Helton marketed Diamond’s bailout program and his bankruptcy services as part of a “credit repair” system.

Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois, announced the sentence today with Robert D. Grant, Special Agent in Charge of the Chicago Office of the Federal Bureau of Investigation; Barry McLaughlin, Special Agent in Charge of the U.S. Housing and Urban Development Office of Inspector General in Chicago; and Thomas P. Brady, Inspector in Charge of the U.S. Postal Inspection Service in Chicago. The U.S. Trustee Program, a Justice Department component that oversees administration of bankruptcy cases and private trustees, also assisted in the investigation.

The government is being represented by Assistant U.S. Attorneys Joel Hammerman and Mark E. Schneider.

The case is part of a continuing effort to investigate and prosecute mortgage fraud in northern Illinois and nationwide under the umbrella of the interagency Financial Fraud Enforcement Task Force, which was established to

ILLEGAL ROBO-SIGNING CONTINUES

Lawmakers and enforcement agencies called for hearings and further investigation Tuesday after learning that the illegal practice known as robo-signing has continued in the mortgage industry.
The Associated Press reported on Monday that county officials in at least three states - Massachusetts, North Carolina and Michigan - say they have received thousands of mortgage documents with questionable signatures since last fall. That's when forged signatures and false affidavits - also called robo-signing - led to a temporary halt to foreclosures. Banks and mortgage processers promised to stop the practice. But the findings of the county officials indicate that robo-signing is still a widespread problem.
Sen. Sherrod Brown, D-Ohio., chair of the Financial Institutions and Consumer Protection Subcommittee, said the subcommittee will hold a hearing on the robo-signing issue.
Wall Street and some in Washington want the public to believe that robo-signing is a thing of the past, but the same risky practices that put our economy on the brink of collapse continue to infect the housing market.
Rep. Maxine Waters, D-Calif., a senior member of the House Committee on Financial Services said the lenders who continue the practice need to be investigated and prosecuted. She believed regulators should step in and that the absence of stronger regulation is the reason why the system broke down in the first place" She said the county officials' findings show lenders will not stop
County officials, who are responsible for keeping land records, including property deeds, say that they have received thousands of robo-signed documents filed in their offices since October.
In Essex County, Mass., the office that handles property deeds has received almost 1,300 documents since October with the signature of "Linda Green," but in 22 different handwriting styles and with many different titles.
In Guilford County, N.C., the office that records deeds says it received 456 documents with suspect signatures from Oct. 1, 2010, through June 30. And in Michigan, a fraud investigator who works on behalf of homeowners says he has uncovered documents filed this year bearing the purported signature of Marshall Isaacs, an attorney with foreclosure law firm.
Early Tuesday, an official from the office of Minnesota attorney general, Lori Swanson, contacted the Essex County's John O'Brien to get more information for its own investigation into robo-signing. The Massachusetts attorney general's office also confirmed that it is meeting with several of the state's 21 registers of deeds to assess the extent of robo-signing in the state.
Also on Tuesday, nine recorders of deeds in Illinois held a press conference to say they will assist the state's attorney general Lisa Madigan who is investigating robo-signing in her state.
Rep. Waters, meanwhile, says the Office of the Comptroller of the Currency, or the OCC, is the main federal regulator for banks. As such, it's the OCC's responsibility to investigate the banks.
The OCC has been criticized by lawmakers and consumer advocates for going easy on banks in the past. The same criticism has resurfaced since the robo-signing scandal broke in September. Last fall, The Associated Press found that robo-signed documents led to banks wrongfully foreclosing on people who had paid their mortgages in full. When asked about the issue, an OCC spokesman flatly denied that any such thing had ever occurred.
The OCC partnered with other federal regulators and conducted a review of bank procedures including robo-signing in December. In April, the 14 largest national banks entered into a consent decree with the OCC in which they vowed to submit action plans as to how they would address such systemic issues as robo-signing.
Last week, the banks delivered those action plans to the OCC, which is now reviewing them, a spokesman said.

Iowa Real Estate Broker Charged with Fraud, Identity Theft, and Money Laundering

FBI

 

 

Jean Teresa Hoffert, age 59, from Emmetsburg, Iowa, has been charged with 13 counts of mail fraud, six counts of bank fraud, three counts of aggravated identity theft, and three counts of money laundering. The charges are contained in an Indictment unsealed today in United States District Court in Sioux City.

The Indictment alleges that, between about the spring of 2005 and the summer of 2008, while acting as a real estate settlement agent, Hoffert fraudulently kept portions of sale or mortgage loan proceeds. Rather than using the proceeds to pay off existing mortgage loans on the properties as she was required to do, Hoffert allegedly used the money for her own purposes. In one instance, Hoffert allegedly used over $18,000 in loan proceeds to pay off an automobile loan.

The Indictment alleges that, in order to conceal her fraud, Hoffert caused original mortgage lenders to send statements and other bank correspondence to a post office box under her control. The Indictment also alleges Hoffert attempted to conceal her fraud by making payments on existing mortgage loans. Hoffert allegedly used the account numbers and names of other persons without authority to do so.

If convicted on all charges, Hoffert faces a mandatory minimum sentence of two years’ imprisonment and a possible maximum sentence of 476 years’ imprisonment, a $6,250,000 fine, $2,500 in special assessments, and 81 years of supervised release following any imprisonment.

Hoffert appeared with her lawyers today in federal court in Sioux City and was released on bond. Hoffert’s next appearance for trial is set for January 3, 2011.

As with any criminal case, a charge is merely an accusation and a defendant is presumed innocent until and unless proven guilty.

The case is being prosecuted by Assistant United States Attorney Peter Deegan and was investigated by the Spencer, Iowa Police Department, the Emmetsburg, Iowa Police Department, the Iowa Division of Criminal Investigation, the United States Postal Inspection Service, and the Federal Bureau of Investigation.

Wilbur Ross’s Mortgage Company Faces Servicing Suits

Bloomberg

 

 

Billionaire Wilbur Ross’s American Home Mortgage Servicing Inc., facing lawsuits by attorneys general in two states, was sued by a homeowner who accused the firm of using tactics that lead to improper foreclosures.

The lawsuit, filed Oct. 25 in federal court in Dallas, seeks class-action status on behalf of homeowners with mortgages serviced by American Home going back to 2006. American Home’s “illegal, unfair and deceptive business practices victimize borrowers” across the U.S., according to the complaint.

American Home “routinely and systematically assesses unwarranted fees against consumers, resulting in premature default that often gives rise to unfair and improper foreclosure proceedings,” according to the complaint.

Banks and loan servicers are under scrutiny for their foreclosure practices following accusations they relied on faulty documentation to foreclose on people’s homes. Attorneys general in all 50 states have launched a coordinated investigation into the issue.

The complaint in Dallas, filed by Kay VanHauen of Sanger, Texas, follows lawsuits by Greg Abbott, the state’s attorney general, and Ohio Attorney General Richard Cordray. They separately sued American Home, based in Coppell, Texas, for alleged violations of consumer protection laws.

‘Without Merit’

“While a lawsuit on occasion may identify a legitimate servicing error, most of which are isolated and none of which to our knowledge indicate any systematic process flaws or patterns or unlawful behavior, we believe the majority of them are without merit,” Philippa Brown, a spokeswoman for American Home, said today in a phone interview.

Ross, 72, is chief executive officer of WL Ross & Co., a company that specializes in reorganizing distressed companies. He founded the New York-based company in 2000 after overseeing the bankruptcy practice at Rothschild Inc.

WL Ross bought American Home from its bankrupt lender parent in 2008, and later added operations and servicing contracts from H&R Block Inc., Citigroup Inc. and Taylor, Bean & Whitaker Mortgage Corp. Servicers collect payments from homeowners, negotiate loan modifications and foreclose on properties when borrowers default.

In an Oct. 23, 2008, interview with Bloomberg Radio, Ross said American Home was the second-largest servicer of subprime mortgages in the U.S. and was “eager” to continue expanding. The company has servicing operations in Irvine, California, Jacksonville, Florida, and Pune, India, according to its website.

‘Unconscionably One-Sided’

In his lawsuit, the Ohio Attorney General said American Home required borrowers to sign loan modifications, forbearance agreements and security-retention agreements that contain “illegal and unfair provisions and are unconscionably one- sided” in the company’s favor. American Home also provided “incompetent, inadequate and inefficient customer service,” lost documents and failed to respond to requests by borrowers for assistance, according to the complaint.

“The acts of some mortgage servicers have gone beyond the point of being negligent -- they have become predatory financial practices and in Ohio, they won’t be tolerated,” Cordray said in a statement on Nov. 5, when the lawsuit was filed.

Default Increase

The Texas Attorney General said in his lawsuit that American Home fails to properly credit homeowners for payments made on their mortgages; falsely claims borrowers didn’t make payments in order to justify late fees; and refuses to accept payments allegedly because a borrower is in default, thereby adding more late charges. The result, Abbott said, is to render homeowners in default on their mortgages.

“The cumulative effect of the foregoing acts and practices was to place more homes into foreclosure than there should have been,” Abbott said in the Aug. 30 lawsuit.

American Home is among 30 banks and mortgage companies that Abbott wrote to on Oct. 4, demanding they halt foreclosures in the state until they ensure that foreclosures that relied on faulty documents “will be rectified” and that future foreclosures are done with “legally correct documentation.”

American Home has been reviewing its procedures and is placing “tighter controls” on document signing and notarization, according to the attorney general’s office. The company found “a very limited number of cases” in which a person signing a document may not have done so in the presence of a notary, according to the attorney general.

Misapplied Payments

The lawsuit by VanHauen, the Texas homeowner, mirrors allegations made by the attorney general. American Home, she said, misapplied mortgage payments on two loans in September 2008 and improperly assessed fees and other charges. After notifying American Home about the problem, the company refused to correctly apply the payments. It treated the loan as being in default and initiated foreclosure proceedings, according to the complaint.

American Home also charged her for a homeowner insurance policy she didn’t need and charged her for property taxes she was paying to the county, according to the complaint. VanHauen proposed that her lawsuit cover homeowners who have similar complaints against American Home.

American Home has faced similar allegations in other lawsuits. In an April lawsuit filed in federal court in Baltimore, Michael and Ingrid Landi of Frederick, Maryland, accused American Home of falsely claiming in October 2009 that they had not made mortgage payments. American Home has asked the court to dismiss the complaint.

San Diego Suit

In a complaint filed in May in federal court in San Diego, American Home was accused of foreclosing on a home while it was discussing a loan modification with the owner, Kenneth Coplin. Coplin said in his complaint that American Home assured him it didn’t intend to foreclose or sell the property “in an effort to conceal” its intention to “mislead” him and “steal” the property.

Brown, the American Home spokeswoman, said the lawsuit was dismissed. The most recent entry on the court docket shows the case would be dismissed if Coplin failed by Oct. 25 to file certain documents related to serving the complaint. Coplin couldn’t be reached for comment.

Niche Lawyers Spawned Housing Fracas

The Wall Street Journal

Lawyer Michael Gaier switched his focus to foreclosure defense.

 

 

The paperwork mess muddying home foreclosures erupted last month. But the legal strategy behind it traces to a lawyer's gambit in 2006 that has helped keep one couple in their home six years beyond their last mortgage payment.

Lillian and Robert Jackson stopped paying on their home in Jacksonville, Fla., in 2004 when business dropped off at their cleaning company. Eviction might have seemed inevitable when they faced a foreclosure hearing two years later.

But their lawyer, James Kowalski, had the idea of taking a deposition from the signer of the mortgage papers. When a document processor for GMAC Mortgage admitted she routinely signed such papers without being familiar with details of the loans, she was tagged as one of a species now known as robo-signers.

It was a first step in the growth of a legal sub-specialty called foreclosure defense that has sown confusion and turmoil in the housing market. Lawyers in the field now commonly use a technique more identified with corporate litigation: probing depositions, designed to uncover any lapses in judgment, flaws in a process or wrongdoing. In the 23 states where foreclosures entail a court hearing, the bank may be ordered to pay the homeowner's legal bill if a lawyer can convince a judge that the bank has submitted false documents, such as affidavits saying employees personally reviewed the details of loans when they didn't.

The housing-market uncertainty stemming from the foreclosure fracas is unabated, despite moves by Bank of America Corp. and GMAC to resume some suspended foreclosure sales. In Florida, with over half a million foreclosure cases, banks that are reviewing their documentation have canceled hundreds of court hearings in recent weeks. Big banks that have said they are finding few or no flaws in the foreclosure process have encountered skepticism from some of the state attorneys general probing the mess, and those authorities are pushing ahead.

The great majority of delinquent borrowers don't hire lawyers but leave the home right before getting evicted. Some lawyers who represent financial institutions take a dim view of the growing ranks of lawyers pushing for a different outcome.

"There is a movement afoot by [state attorneys general] and private lawyers to use technical problems to avoid foreclosures where the borrower is in default and the foreclosure is in all respects substantively appropriate. These are lawyers where the best job they can do for their clients is to keep them in their houses without paying the mortgage," said Andrew L. Sandler, a Washington securities lawyer who represents banks and firms that service mortgages.

Mr. Sandler added: "The class-action lawyers are swarming around this issue right now, because they perceive that it can result in significant fees for them. But they're not well-founded cases, and the banks will vigorously contest any class action around these issues."

The big risk to banks and the housing market, indeed, is that more homeowners and lawyers come to see such cases as attractive to fight.

Mr. Kowalski in Jacksonville has already filed a suit seeking class-action status, in circuit court in St. Johns County, Fla., naming Deutsche Bank AG and Citigroup Inc. mortgage unit Citi Residential Lending, accusing them of violating Florida laws and seeking nonmonetary relief. On Tuesday, a New Jersey law firm filed a damage suit in federal court in New Jersey accusing Bank of America of breaching contracts with borrowers at settlement.

A spokesman for Citi called the suit "without merit." B of A declined to comment. Deutsche Bank didn't have any immediate comment.

It isn't clear how significant the suits ultimately will be. Lenders say paperwork problems can easily be fixed, and foreclosures can proceed. "The homeowner might get to live in the house for a few more months free. But these people do not have a right to a free house," said Laurence E. Platt, an attorney who represents mortgage lenders.

The suits, probes and foreclosure freezes are the culmination of a legal drama that has been unfolding, largely unnoticed by the public, since the case against the Jacksons was thrown out in 2006 by Florida state-court Judge Bernard Nachman.

He ordered GMAC Mortgage, a unit of Ally Financial Inc., to pay the $8,000 fee of the Jacksons' attorney after finding GMAC had filed false testimony, an affidavit in which a document signer, Margie Kwiatanowski, said she had personal knowledge of the details of loans such as the Jacksons'. GMAC declined to make Ms. Kwiatanowski available for an interview.

The judge also ordered GMAC to confirm that it had changed its policies to make sure anyone signing a document on its behalf read and fully understood the instrument. "Do not sign unless you have that comfort level," a GMAC memo then advised employees. "Do not sign verifications on court pleading documents unless you have independently checked the facts."

GMAC, which serviced the Jacksons' loan but didn't hold the mortgage, said: "As a servicer we try to avoid foreclosure whenever possible and work with the borrower on forbearance and home-preservation options before pursuing foreclosure." The firm wouldn't comment on cases still to be litigated.

GMAC also said it is reviewing all mortgages it services to make sure documents are properly prepared. It has never re-filed the case involving the Jacksons' house.

The Jacksons, still living there, are seeking a settlement. "What we want to do is to take the foreclosure off the credit report and dissolve it completely, so we can refinance the home and start over," said Ms. Jackson, 57.

In 2009, three years after the Jackson ruling, other Florida lawyers got into the act. Unaware of that case, a small law firm called Ice Legal took a deposition from another GMAC employee, who also testified to routinely signing foreclosure documents without reviewing the loans.

That testimony came about because the small law firm's founder, Thomas Ice, was searching for a way to help his bankruptcy clients.

Mr. Ice founded his firm in 2008 to focus on consumer bankruptcy, after a career at big law firms defending companies against plane-crash and SUV-rollover suits. With his wife, Ariane, a paralegal, he set up Ice Legal in a strip mall in Royal Palm Beach, Fla., next to a dentist.

As the economy frayed, bankruptcy clients appeared. Mr. Ice would help them with Chapter 13 filings that enable individuals, with a judge's blessing, to get rid of credit-card, car-payment and other debt. But the law doesn't let judges reduce someone's mortgage.

Searching for a way to defend clients facing foreclosure, Mr. Ice began researching English case law and the history of property rights. He ran across Sheldon v. Hently, a 1680 case that said an indebted merchant owed his debt to the person who had lent him the money, not to a debt collector who came around bearing a note.

While the English case didn't bear specifically on his work, it got Mr. Ice thinking about the concept of ownership of a debt, he says. A little more than a year after opening his firm, in the case of Boca Raton woman facing foreclosure, he decided to depose the GMAC employee who had actually signed documents concerning her indebtedness.

It was while grilling that employee, Jeffrey Stephan, that the firm discovered faulty documentation was more common than people had realized. Mr. Stephan testified he regularly signed more than 10,000 court affidavits a month without doing the required review of loan files.

Mr. Stephen also mentioned the name of his boss: Ms. Kwiatanowski, the woman whose failure to review loans before signing off had enabled the Jackson family in Florida to escape foreclosure for years.

Mr. Ice mentioned the deposition testimony to a fellow lawyer, Matthew Weidner. "Tom and I were talking, and it was, 'Jesus, they're like robots!'" Mr. Weidner says.

Mr. Weidner is also a blogger, and on Jan. 8 he wrote a blog post with an appellation for the routine signers. "We know from depositions taken of these 'robo signers,'" he wrote, "that they don't even read the documents placed in front of them and the notaries and witnesses that are supposed watch them as they sign are not present."

A GMAC spokeswoman, asked how Mr. Stephan could have submitted such affidavits years after a company memo had admonished employees to check the facts, said: "Obviously the policy wasn't being followed, and we discovered this procedural error. We became aware of the breakdown recently." Mr. Stephan couldn't be reached for comment. The woman in the Boca Raton case remains in her home.

Mr. Ice, recounting the suit and the legal steps he took, said it shows "the need for the complex litigation that is required to win these foreclosure cases."

Mr. Stephan re-emerged in June, in a case that helped spark the current foreclosure turmoil. A pro bono lawyer in Maine, Thomas Cox, took another deposition from Mr. Stephan, who again acknowledged routinely signing documents without reviewing the loans.

GMAC tried to sanction the lawyer on grounds he had embarrassed its employees, a maneuver that could have kept him from using the Stephan deposition as evidence. The motion was denied by Maine's Ninth District state court, which also ruled, late last month, that GMAC had submitted the Stephan affidavits "in bad faith." The court ordered GMAC to pay Mr. Cox $27,000, a sum it said he might have earned for his legal work if he hadn't been working pro bono.

GMAC suspended its foreclosure sales in 23 states in September and widened the freeze in October, before saying on Monday that it would again push forward with some of them. It has been replacing court affidavits that Mr. Stephan signed with documents signed by others.

At Ice Legal in Royal Palm Beach, attorneys are working through a load of several hundred foreclosure cases. Mr. Ice has hired three new lawyers and says he's so busy he has stopped playing golf and spends most of his time at the office. The firm has deposed alleged robo-signers at three other lenders or mortgage-serving companies besides GMAC.

Michael Gaier, on of the top lawyers in Philadelphia, switched to foreclosure defense last year after years of representing patients in malpractice suits and consumers who said they had purchased faulty products. His new legal practice "is academically challenging, and I'm hoping it'll be financially rewarding. I'm hoping the banks rewrite the mortgages, cover my fees. That's my end game," said Mr. Gaier.

Mr. Kowalski, the lawyer who in 2006 unearthed a robo-signer before that term was common, said, "I don't think the [mortgage] servicers ever thought that their process was going to see the light of day. It's just that so many of us have taken so many of these so far, that now, in 2010, we finally have some traction."

Banks Face Mortgage Scrutiny as $49 Billion in Value Vanishes‏

Bloomberg

 

 

Citigroup Inc., Bank of America Corp. and Wells Fargo & Co., set to report earnings this week, face investors groping for answers after evidence of flawed foreclosure documents triggered a selloff of U.S. bank stocks.

The banks plus JPMorgan Chase & Co. saw $49.3 billion in market value shaved off in the three days ended Oct. 15 amid concern that rising costs of faulty foreclosures will eat into profits. JPMorgan set aside $2.3 billion of reserves to cover mortgage repurchases or litigation expenses, including some for “mortgage-related matters,” the lender said Oct. 13.

“We’ve had two banks report good earnings in terms of credit-quality costs coming down,” said Erik Oja, an equity analyst at Standard & Poor’s in New York, referring to JPMorgan and First Horizon National Corp. “But people don’t care. They say ‘Well, how many foreclosures do you have in the pipeline? And what are you seeing?’ And they answer that we’re looking at each one. And people say ‘All right, sell.’”

An investigation by attorneys general in all 50 states into foreclosure practices has fueled speculation that banks will have to purchase billions of dollars in loans from mortgage-bond investors who will challenge the paperwork. Lenders have suspended foreclosures in some states and started reviews after court documents surfaced showing employees at several large mortgage firms signed papers without ensuring their accuracy.

Oja cut his recommendation on Charlotte, North Carolina- based Bank of America to “hold” from “strong buy” on Oct. 15 because of uncertainty about mortgage costs.

Dimon’s ‘Blip’

JPMorgan Chief Executive Officer Jamie Dimon, 54, faced analysts’ questions about foreclosures on the company’s third- quarter conference call Oct. 13. Dimon said the New York-based lender probably will pay an “incremental” sum to review and fix foreclosure documents.

“If you’re talking about three or four weeks, it will be a blip in the housing market,” Dimon told investors. “If it went on for a long period of time, it will have a lot of consequences, most of which will be adverse on everybody.”

Analysts differ in their cost estimates. Compass Point Research and Trading LLC’s Chris Gamaitoni estimated in August that lenders may suffer as much as $179.2 billion in losses tied to soured mortgages they will be forced to repurchase from mortgage-bond insurers and investors. Last week, Mike Mayo, an analyst at Credit Agricole Securities USA in New York, estimated a cost of $20 billion for repurchases when including government- sponsored entities Fannie Mae and Freddie Mac. Goldman Sachs Group Inc.’s Richard Ramsden said a worst-case scenario would be $84 billion, while Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said it could cost the banks as much as $91 billion.

‘A Lot of Uncertainty’

“There’s a lot of uncertainty surrounding what the eventual cost of mortgage repurchases will be,” Deutsche Bank AG analysts led by Matthew O’Connor wrote in a note last week. “The bad news is we (and the banks) won’t know the answer for some time. The good news is the banks should have time to absorb the losses.”

Bank of America, JPMorgan and Wells Fargo have the most at stake, O’Connor wrote.

Citigroup today said third-quarter profit rose to $2.17 billion, beating analyst estimates, as it reduced loan-loss reserves. The New York-based bank set aside $322 million to repurchase mortgages, compared with $347 million in the second quarter. Bank of America, which has halted foreclosure sales in 50 states, is scheduled to report third-quarter results tomorrow, and San Francisco-based Wells Fargo will announce results Oct. 20.

‘Messy Process’

The four banks control more than 55 percent of the market for billing and collections on U.S. home loans, according to Barclays Capital Inc. When borrowers default, the firms handle the foreclosure process.

Wells Fargo, which said it is proceeding with foreclosures, may have litigation and repurchase expenses of $15 billion over the next four years, according to Anthony Polini, a banking analyst at Raymond James & Associates Inc.

“Litigation expenses are going to be high,” Polini said in a phone interview. “Foreclosures are a messy process and one that will provide a headwind to earnings, but it doesn’t mean this recovery is postponed. It just means it happens at a slower pace.”

‘Grossly Distorted’

Barbara Desoer, 57, head of home lending at Bank of America, said Oct. 15 that estimates of added costs from foreclosures have been “grossly distorted.” The bank, the largest in the U.S. by assets, stands by the accuracy of its process, she said in an interview.

Mark C. Rodgers, a spokesman for Citigroup, said in an e- mailed statement last week that the bank has safeguards in place to prevent improper filings. Wells Fargo has enacted an additional review of pending foreclosures in 23 states to provide “further assurance” that information is correct, a spokeswoman, Vickee Adams, said last week.

Bank of America dropped $1.54, or 11.4 percent, in the three days ended Oct. 15, while Citigroup fell 29 cents, or 6.8 percent, the biggest three-day drop for the stocks since July. Wells Fargo declined $2.39, or 9.2 percent, the largest such falloff since May. JPMorgan fell $3.25, or 8 percent, over the same three days, the worst such period since the three days ended Jan. 22.

The market value of the 24 lenders in the KBW Bank Index fell by a combined $58.5 billion in the three days, according to data compiled by Bloomberg.

“People are trying to sort out who’s going to bear the costs,” said James Barth, a professor of finance at Auburn University in Alabama and senior finance fellow at the Milken Institute in Santa Monica, California. “Someone has to pay for this, and that’s going to be the lenders.”

Saudi Mortgage Law Could Spark $32 Billion of Lending a Year‏

Bloomberg / BusinessWeek

 

 

After five years of searching for a mortgage in the Saudi Arabian capital, Riyadh, 28-year-old Abdulaziz Al Salem has some advice for his peers: Forget it.

“Home ownership in this country is nothing short of a nightmare,” said the father of one. “If you’re not descended from a wealthy family or have an extremely successful business, you probably should give the whole thing a pass.”

Frustrated young Saudis like Al Salem could spark a lending market that Capitas Group International estimates at $32 billion a year for the next decade if the kingdom passes a mortgage law that’s been a decade in the making. Saudi Arabia is literally millions of homes short of meeting its needs, after housing finance failed to keep up with a population that has quadrupled over 40 years to 28.7 million.

The proposed law is part of a planned overhaul of the kingdom’s home finance market, regulating all parts of the industry: from registering mortgages to allowing judges to prosecute police officers who refuse to carry out eviction orders. The changes are aimed at easing the concerns of lenders discouraged by unclear regulation that could lead to lengthy court disputes.

“You can’t function as a mortgage finance business without having a law that regulates all activities,” said Henry Azzam, chairman of Deutsche Bank AG in the Middle East and North Africa. The new law will encourage banks to lend by making it easier to take action when a borrower doesn’t pay, he said.

Vote Imminent

A vote by the country’s Shura Council on disputed sections of the law is expected within the next few weeks, said Abdulaziz Al Gasim, a partner at Al Gasim Law Firm who was involved with drafting the mortgage law alongside Allen & Overy LLP. If the government and the council can’t agree, King Abdullah will have to make the decision himself.

Credit Suisse Group AG estimates that 2 million homes must be built by 2014. Saleh Al-Shoaibi, head of the Shura Council’s Economic Affairs and Energy Committee, says the country will need 18 million to 20 million homes over 10 years.

“The demand is huge and can’t be easily met,” Al-Shoaibi said. “It will require a system that facilitates home ownership.”

Saudi authorities began drafting the new property laws about a decade ago. Provisions about evictions and home foreclosures led to disagreements between the government and the Shura Council, delaying its passage for years. The latest hurdle involves the way Islamic products should be regulated and which authorities will be responsible, Al Gasim said.

Islamic Law

Saudi Arabia, the most populous of the Gulf Cooperation Council countries, favors a strict interpretation of Islamic law that’s overseen by religious authorities. Lending for the purpose of receiving interest payments is banned, prompting Islamic finance arrangements akin to shared ownership or payment by installments. Sixty percent of the country’s 28.7 million people are below the age of 25.

Less than 1 percent of all Saudi home purchases are financed by mortgages. That compares with 7 percent in neighboring United Arab Emirates and 66 percent in the United States, Deutsche Bank estimated in November.

Banks have avoided lending because the Saudi notary public doesn’t recognize conventional loans and conflicts with non- paying buyers would lead to battles in an untested legal system, said Glenn Lovell, an associate at law firm Al Tamimi & Co.

Delays in passing the mortgage law haven’t damped the enthusiasm of all lenders. Deutsche Bank formed a $110 million joint venture for mortgages compliant with Islamic sharia law in April and it’s already giving out 5-year to 20-year mortgages to both Saudis and foreigners living in the kingdom.

Young Couples

“The segment that we’re targeting is the 500,000 riyal ($133,000) home mortgage,” said Paul Loiacono, chief operating officer at Deutsche Gulf Finance. “The person looking for that is part of a young up-and-coming couple looking to buy a first home.”

Builders in the Persian Gulf region, hit by slumping orders in their home countries, are eager to expand in Saudi Arabia when lending picks up. Sorooh Investment of Kuwait started its property development unit in the kingdom after the financial crisis hit the region in mid-2008. It’s now building two projects in the country’s eastern province, gaining a foothold in the market ahead of the law.

“When a mortgage law passes, Saudi Arabia will pull in most of the region’s real estate developers and construction companies,” said Tariq Ali Al-Binali, Sorooh’s vice president of investment. “Every company will be looking to do business in Saudi.”

Strings Attached

Though mortgages are available to young Saudis, they tend to come with strings attached that are unpopular with borrowers. Lenders often demand the title to the property, stress their right to evict defaulters and seek complete control over borrowers’ accounts to prevent them from obtaining loans elsewhere.

“I’ve been renting for the past 10 years and that’s money down the drain,” said Badr Abdulla, a 29-year-old resident of Riyadh. “But that’s still better than putting my life and bank account under the direct control of banks.”

Right now, most buyers pay cash or get interest-free loans from the country’s Real Estate Development Fund, which can’t keep up with the large number of applicants, according to Deutsche Bank. Some use money provided by the fund to buy land before tapping into consumer loans, end-of-service pay or pensions to fund the construction of homes. Others rely on cash gifts from their families combined with personal loans to build or buy homes.

No Collateral

Banks are “simply looking at the pay of an individual, mostly in the high-income segment, because they don’t have direct recourse to an asset,” said Naveed Siddiqui, chief executive officer of Capitas Group International, a Saudi Arabia-based holding company focused on Islamic financing. “The law will give them that recourse and that’s a big, big stimulus.”

Most of Saudi Arabia’s demand is centered in the low-and mid-income segment with prices of about 500,000 riyals. Most projects under construction are at the upper end of the market, where prices are three times higher, according to Imad Damrah, country director at property consultants Colliers International.

“It’s virtually impossible to find a good-quality apartment at a reasonable price,” said Al Salem, who is still no closer to making purchase. “Most buildings lack proper facilities and the designs are very old. The finishing in many of the new developments is also not worth the money they are demanding.”

Mismatch

The mismatch is unlikely to be resolved without government intervention through public-private partnerships that would subsidize developers, said Al Gasim, who sits on the mortgage law committee.

“The government may have to finance the building of low-to mid-income housing the same way it financed petrochemical projects,” he said. “Effectively, it would have to lead both supply and demand.”

The Saudi government may extend an experimental program that allows some developers to sell properties before they are built to help secure funding for construction. Previously, companies had to finance projects in full before offering properties for sale, according to Credit Suisse.

It may take a couple of years for a new mortgage law to have a significant impact on the market, analysts say. Banks may remain wary of courts overseen by religious judges, especially in cases involving interest, which is prohibited under Islamic law. Regulations on originating and securitizing loans will also take time to work out.

Lending ‘Flat’

“When you look at Saudi banks’ loan growth, it has been flat or contracting,” said Tarik El Mejjad, a London-based analyst at Nomura International Plc. “Banks have to first deal with issues of loan securitization if they are to broaden their funding sources.”

Though there are many hurdles to overcome, passing a mortgage law is a matter of when, not if, Deutsche Gulf Finance’s Loiacono said.

“There are huge social pressures that I see every day with my customers,” he said. The law “is the only way to free up the real estate market and bring it to the masses. It has to happen.”

Al Salem plans to wait a few years before resuming his long search for an affordable mortgage.

“Maybe in five years home prices will have come down and mortgages will be more affordable as more banks get into the market and compete for my business,” he said.

Banks Restart Foreclosures

The Wall Street Journal

 

 

Two major lenders at the center of the foreclosure crisis took steps Monday to put the mess behind them by restarting home seizures that were frozen by documentation concerns.

Bank of America Corp. reopened more than 100,000 foreclosure actions, declaring that it had found no significant problems in its procedures for seizing homes. GMAC Mortgage, a lender and loan servicer, said that it also is pushing ahead with an unspecified number of foreclosures that came under intense pressure.

Monday's moves are part of a growing counterattack by lenders scrambling to stem a financial and political threat over allegations that certain employees signed hundreds of documents a day without carefully reviewing their contents when foreclosing on homes.

Bank of America, the nation's largest bank in assets, which imposed on Oct. 8 a nationwide moratorium on the sale of foreclosed homes, said it has begun preparing new affidavits for pending foreclosures in 23 states where a judge's approval is required. The paperwork will be submitted to courts by next Monday, and foreclosure sales will resume in those states starting in November, according to the bank.

"This is an important first step in debunking speculation that the mortgage market is severely flawed," said Bank of America spokesman James Mahoney. More details will be disclosed when the company reports quarterly results Tuesday.

Citigroup Inc. Chief Financial Officer John Gerspach said the bank has found no reason to halt foreclosures, calling its internal procedures "sound." "We have not identified any system issues," he said Monday.

Restarting the nation's foreclosure machine puts the lenders on a collision course with state attorneys general, who announced last week a nationwide investigation of foreclosure practices. Some state officials have been pushing for a wider halt to foreclosure sales, but Bank of America's moves show determination by at least some lenders to get back to business while the investigation proceeds.

A Bank of America spokesman said the bank has found "no cases" thus far of foreclosures that should not have "gone through." Last week, James Dimon, J.P. Morgan Chase & Co. chairman and chief executive, said that no one has been "evicted out of a home who shouldn't have been."

Some top attorneys general said they have little confidence that problems with foreclosures have been fixed. "We've been in discussions with some of the major servicers, and as part of that they've assured us that they are fixing this problem, but we're not just going to take their word for it," said Patrick Madigan, a spokesman for Iowa Attorney General Tom Miller.

It will be hard for lenders to declare the foreclosure crisis over and get back to business as usual. Bondholders are escalating efforts to recover losses on soured mortgage-bond deals containing loans with flawed paperwork. Meanwhile, federal banking regulators are assigning additional employees to an ongoing review of large mortgage-servicing operations, according to people familiar with the situation. Officials want to make sure that documentation procedures are being followed and companies are meeting all legal foreclosure requirements.

Bank stocks surged Monday as investors reassessed last week's outlook for the cost of the foreclosure mess. Citigroup shares jumped 23 cents, or 5.8%, to $4.18 a share in New York Stock Exchange composite trading at 4 p.m., on better-than-expected earnings. Bank of America rose 36 cents, or 3%, to $12.34, while J.P. Morgan was up $1.05, or 2.8%, to $38.20.

Bank of America is the only major U.S. bank that announced a halt to all foreclosure sales while it reviewed documents for errors. Bank officials say they're readying new affidavits for 102,000 pending foreclosure actions.

A company spokesman said the largest investors in mortgages serviced by Bank of America have signed off on the new timetable. The bank will continue delaying foreclosure sales in the 27 states where court approval isn't required until a review is completed "on a state by state basis." The bank expects delays on fewer than 30,000 foreclosure sales nationwide.

"Now it may be legal, but I am not sure it's ethical," said Robert Quigley, a 68-year-old retired commercial fisherman, who received a legal notice last week that Bank of America is proceeding with foreclosure on his home in Lake City, Fla. A bank spokesman said the bank never said it would stop all foreclosure proceedings, just final sales.

GMAC, a unit of Ally Financial Inc., declined to comment on the number of foreclosures it has reviewed so far, but said they included loans with affidavits signed by employee Jeffrey Stephan. His testimony in a deposition that he signed 10,000 foreclosure affidavits a month without reviewing the underlying documentation led GMAC to halt evictions in 23 states last month while it scrutinized its procedures.

Several lawyers representing borrowers facing foreclosure by GMAC said affidavits signed by Mr. Stephan were replaced by similar filings with the signature of a different employee.

Michael Holmes, an antiques dealer in Belfast, Maine, thought he would get a chance to save his home because the affidavit used by GMAC to substantiate his loan amount was signed by Mr. Stephan. Instead, GMAC replaced Mr. Stephan's document in the courthouse file for the foreclosure proceeding with an affidavit signed by employee Davida Harriott. Her name also appears on substitute paperwork in pending foreclosure cases in Florida, according to court documents and lawyers representing the borrowers.

Gina Proia, a spokeswoman for Ally, said on Monday: "As each case is reviewed and remediated, it moves on." None of the revised foreclosure documents being filed by the company will bear the signature of Mr. Stephan, though he still works for GMAC, she said. Mr. Stephan and Ms. Harriott couldn't be reached for comment.

Ohio Attorney General Richard Cordray, who last week filed a lawsuit against GMAC alleging hundreds of counts of fraud related to foreclosure documents, said he is suspicious of efforts to replace paperwork. "Substituting new evidence in [cases] where there's been fraud won't help prevent the court from sanctioning them for the fraud that has already been committed," he said. "It doesn't unring the bell."

States to Probe Mortgage Mess

The Wall Street Journal

 

 

A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry, an effort some of them hope will pressure financial institutions to rewrite large numbers of troubled loans.

The move comes amid recent allegations that mortgage-servicers, which include units of major banks such as Bank of America Corp., submitted fraudulent documents in thousands of foreclosure proceedings nationwide.

The banks say the document problems are technical—largely the result of papers approved by so-called robo-signers with little review—and don't reflect substantive problems with foreclosures. Still, they have drawn criticism from consumer advocates and state and federal lawmakers.

"I think the mortgage-servicing firms need to understand that they face real exposure now, and they would be well advised to take this very seriously, to clean this up by doing loan workouts to keep people in their homes, which up till now they've just paid lip-service to," said Ohio Attorney General Richard Cordray.

Some in Congress have called for a moratorium on all foreclosures until the documentation issue is resolved, though senior Administration officials Monday again declined to endorse that idea. Servicers that have lied to courts by filing incorrect paperwork "need to suffer the consequences for their irresponsible actions," said Shaun Donovan, the Secretary of the U.S. Department of Housing and Urban Development. But "where we have not found problems with particular servicers…we do have some risk of going too far."

The attorneys' general immediate aim is to determine the scale of the document problems and correct them. But several of them have said that the investigation could force the lenders and servicers to agree to mass loan modifications or principal forgiveness schemes. Other possibilities include financial penalties or changes in mortgage servicing practices.

Lenders and servicers have largely resisted reducing principal on mortgages, instead focusing on interest-rate reductions or term extensions. Banks say they are worried about lawsuits from investors, some of whom could lose money in a principal write down.

Former New Jersey attorney general Peter Harvey, now a trial lawyer in New York, said that a settlement with state attorneys general would likely "to give the banks some cover" to make changes that might otherwise result in lawsuits by investors in mortgage-backed securities.

The mortgage servicers had little to say in response to an impending multi-state probe. "We will work with the attorneys general to address the concerns they have expressed," said Dan Frahm, a spokesman for Bank of America.

"We look forward to cooperating with the attorneys general," said a spokesman for J.P. Morgan Chase & Co., which has suspended foreclosure sales and evictions in 23 states in response to questions about it use of robo-signers. A spokesman for Citigroup said the company, has "no reason to believe our employees have not been following" proper procedures in processing foreclosures. A spokeswoman for GMAC Home Mortgage Inc, a unit of Ally Financial, Inc, said it continued to review its loan documents.

The number of servicing companies that will be included in the probe hasn't been determined.

Iowa attorney general Thomas Miller, who is leading the effort, said his office might take cues from an investigation brought by Massachusetts attorney general Martha Coakley. She successfully pressured Bank of America Corp. in March to reduce mortgage-loan balances by as much as 30% for thousands of borrowers, using the threat of a lawsuit to get a settlement, though documentation problems were not at issue then.

The primary weapon the states could wield would be their respective laws against unfair and deceptive acts and practices, said Prentiss Cox, a professor of law at the University of Minnesota and former Assistant Attorney General in Minnesota.

Those laws are easier to apply, however, when a lender misleads a borrower than in pursuing problems with foreclosures related to documentation, he said. Individual attorneys general could also bring actions under states' various foreclosure laws.

Illinois Attorney General Lisa Madigan said she was preparing to introduce legislation meant to tighten foreclosure laws and prevent document errors in the future. She also is pushing federal representatives to resurrect a bill that would allow bankruptcy judges to "cram down," or cut, a troubled homeowner's mortgage debt.

"The immediate goal is to stop fraudulent foreclosure and to require that the lenders and servicers are following the law. But that's the bare minimum. That's what they have to do to follow the law," she said.

Nearly a dozen attorneys general nationwide, including Ms. Coakley and Mr. Miller, have called on lenders and servicers to suspend foreclosures until document irregularities are studied and corrected.

Top lawyers from multiple states have gone after mortgage lenders before. In 2008, Bank of America Corp. settled charges brought by 15 attorneys related to accusations of predatory lending in its Countrywide Financial Corp. unit, granting loan modifications worth $8.4 billion to thousands of homeowners.

Mr. Cordray, of Ohio, last week became the first attorney general to sue a mortgage servicer, when he filed suit against GMAC Mortgage LLC. The suit also named as a defendant GMAC employee Jeffrey Stephan, an alleged "robo-signer," who said that he signed off on thousands of court documents related to foreclosures without reading them first.

GMAC announced that it was suspending foreclosures in the 23 U.S. states where judges are required to sign off on them after news of Mr. Stephan's activities surfaced. J.P. Morgan Chase & Co.'s Chase Home Mortgage unit suspended judicial foreclosures soon after, and Bank of America followed suit. On Friday, Bank of America widened its foreclosure freeze to all 50 states.

Some attorney generals would like to look beyond the narrow issues raised by the robo-signing. The issue "I'm most engaged in right now is the big servicers who are initiating foreclosures while the borrower is in the modification process," said Arizona Attorney General Terry Goddard.

Attorneys General in 40 States Said to Join on Foreclosures

Bloomberg

 

 

Attorneys general in about 40 states may announce by next week a joint investigation into potentially faulty foreclosures at the largest banks and mortgage firms, according to a person with direct knowledge of the matter.

State attorneys general led by Iowa’s Tom Miller are in talks that may lead to the announcement of a coordinated probe as soon as Oct. 12, said the person, who asked not to be named because an agreement wasn’t completed. The number of states may change because several are deciding whether to join, the person said. New Mexico Attorney General Gary King said yesterday in a statement that his office will join a multi-state effort.

Lawyers representing the banks expect a widening investigation, according to Patrick McManemin, a partner at Patton Boggs LLP, a Washington-based law firm that represents banks, loan servicers and financial institutions. Bank of America Corp., the biggest U.S. lender, yesterday extended a freeze on foreclosures to all 50 states.

“We are aware of or involved in a large number of investigations that lead us to believe there are in the neighborhood of 40 state attorneys general who have initiated investigations or expressed an interest,” McManemin said in a telephone interview.

Justice Department

Officials in at least seven states have already announced probes into claims that employees at home lenders and loan servicers signed court documents without ensuring the information was accurate. On Oct. 7, Miller said in a statement that he was working with state officials, banking regulators and the U.S. Justice Department to launch a coordinated review. Attorneys general in Ohio and Connecticut have said some of the practices may amount to fraud.

The Senate Banking Committee plans to hold a hearing Nov. 16 to investigate mortgage servicing and foreclosure practices, according to its website.

“American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud,” the panel’s chairman, Connecticut Democrat Christopher Dodd, said in a statement. “Regulators at the federal, state and local levels have a responsibility to uphold the law and protect consumers from unfair foreclosure.”

Frozen Foreclosures

Bank of America, JPMorgan Chase & Co. and Ally Financial Inc. already froze foreclosures in 23 states where courts supervise home seizures, amid allegations that employees used unverified or false data to speed the process. Litton Loan Servicing LP, a mortgage-servicing business owned by Goldman Sachs Group Inc., said yesterday it’s halting some foreclosures to review how they’re handled.

Senate Majority Leader Harry Reid, a Democrat from Nevada, called on other banks and mortgage firms to follow Bank of America’s lead and “review their practices to ensure that they are not unfairly targeting homeowners in Nevada and across the nation,” according to a statement yesterday.

“There are reasons for these procedures and those are to make sure the banks own the homes they are foreclosing on,” Robert Lawless, a professor at the University of Illinois College of Law in Champaign, said in a telephone interview. “At the same time I don’t think it is going to be a tidal wave of relief for homeowners. My bet is that there will be a delay.”

Vickee Adams, a spokeswoman for San Francisco-based Wells Fargo & Co., and Mark Rodgers, a spokesman for New York-based Citigroup Inc., said the companies were still processing foreclosures. Thomas Kelly, a spokesman for New York-based JPMorgan, and Gina Proia, spokeswoman for Detroit-based Ally, declined to comment.

Homes Taken

Lenders took possession of a record 95,364 homes in August and issued foreclosure filings to 338,836 homeowners, or one of every 381 U.S. households, according to RealtyTrac Inc., an Irvine, California-based data vendor.

“If you have a national moratorium on foreclosures, that’s a problem,” Paul Miller, an analyst for FBR Capital Markets Corp. in Arlington, Virginia, said in a phone interview. “The longer you drag out foreclosures the longer it takes to get through” the housing slump, he said.

Banks Pressed on Sour Home Loans

The Wall Street Journal

 

Investors in Pool of Securities Seek to Force Lenders to Buy Back or Modify Problem Mortgages

 

 

Big U.S. banks are facing legal pressure to make up for losses tied to pools of soured low-end mortgage loans.

In the latest effort, a group of investors in 2,300 mortgage securities worth roughly $500 billion is seeking to force several banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them.

The move follows other similar efforts. Bond and mortgage insurers, hard hit in the housing crisis, have filed lawsuits accusing lenders and banks of sticking them with flawed loans marred by poor underwriting and faulty appraisals.

Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans underpinning securities sold to mortgage

The banks and lenders are fighting these efforts, saying they aren't responsible for the housing crash.

And the outcome is far from certain and could depend on potentially contentious negotiations and litigation that could drag out for years.

In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.

That data could be used to force banks to repurchase as much as $133 billion in souring home loans, according to Compass Point Research & Trading, a Washington, D.C., boutique investment bank.

The legal efforts focus on the contractual duties of lenders known as "representations and warranties," which can at times require them to repurchase loans or modify them so borrowers can keep paying monthly mortgage bills, which maintains value for mortgage securities tied to the loans.
 

The Trustees' Roles

At issue are the roles of trustees and loan servicers. Trustees are little-known administrators inside banks responsible for overseeing loan pools, or securitizations, on behalf of investors. Loan servicers handle day-to-day management of loans, including deciding how and whether to modify the terms of a loan. Both are charged with oversight of pools that hold thousands of loans.

If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.

But some loan-servicing units reside inside the same banks that originated or underwrote the loans or securities. This sets up a potential conflict of interest because a loan-servicing arm would have to force another department or affiliate inside a bank to take back a problem loan.

In a letter to the trust departments of several large banks, Talcott Franklin, a Dallas lawyer representing the investors holding 2,300 mortgage bonds, claims the loan-servicing units too infrequently modify poor-performing home loans underpinning mortgage securities or replace them with better loans.

"This is of great concern to the pension funds, bank and credit-union depositors, mutual fund holders, 401(k) holders, endowments, state and local governments and taxpayers who depend on the performance of these investments," the letter says.

U.S. Bancorp, Bank of America Corp., Bank of New York Mellon Corp., and Wells Fargo & Co. received the letter from Mr. Franklin, while Deutsche Bank AG didn't, according to people familiar with the situation. The banks either declined to comment or didn't return requests for comment on the letter.

In a statement, a spokeswoman for Wells Fargo said the bank has "an established track record of responding to all legitimate verified bondholder inquiries in a timely manner."

A key first step in the legal fights is obtaining the loan files that will detail how the loans were originated and what is being done now to salvage investors' money.

If the investor maneuver is successful in getting the loan information, "this will lead to similar actions taken by a larger set of bondholders," said Chris Gamaitoni, a Compass Point senior analyst. "We believe that once loan files are acquired, that the breaches of reps and warranties will be relatively clear."

In an Aug. 17 report, Compass Point said the litigation makes common claims: "A significant portion of the underlying loans failed to comply with the underwriting guidelines or other reps and warranties, and thus misrepresentations and material omissions were made in connection with the sale of" residential mortgage-bond securities.

In recent weeks, some of the banks have begun early-stage talks with Mr. Franklin to provide data about the loans underpinning the securities, such as loan documents and how the loan has been serviced. Separately, Mr. Franklin hopes to persuade the trustees to take increased steps to deal with souring loans, such as forcing loan sellers to repurchase the loans or requiring loan servicers to improve loan servicing.

In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.

In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.
 

'That's Just Not Right'

Some investors "had no idea that their money was being invested in mortgage-backed securities," said Mr. Franklin. "And yet somehow these people are now the ones being punished, and that's just not right."

To keep track of the securities his clients own and protect his clients' confidential holdings, Mr. Franklin uses a software system he designed with a college friend, who consults on how to design large databases. Mr. Franklin calls it the "Tranche" program, a reference to the French word for slice or layer. Mortgage securities are chopped into tranches based on risk and return.

His clients' information is coded and Mr. Franklin keeps a secret code book as a reference. Mr. Franklin said the system is important because it lets him know when his clients in a specific deal have amassed enough voting power.

In the other cases, bond insurer MBIA Inc. sued Credit Suisse Group in New York state court in December over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.

In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc., sued a Credit Suisse unit in New York state court, alleging that it made "false and misleading" representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.

A Credit Suisse spokesman said the claims are without merit and the bank will defend itself against the claims.

Separately, American International Group Inc. is analyzing mortgage deals it insured before it imploded in 2008. Chief Executive Robert Benmosche told investors in May that the company will take "appropriate action" if it finds it was harmed by the transactions.

Home Mortgage Modification Snags Spark Lawsuits

USA Today

Anthony and April Soper's financial troubles were only starting last October when they applied for a mortgage adjustment through the Obama administration's Home Affordable Modification Program.

Bank of America, their mortgage servicer, put them on a HAMP trial payment plan in December that cut their monthly payment by more than half from almost $4,000 to about $1,826.

They say they made their reduced monthly payments early and did everything else that was asked of them. But they didn't get a permanent modification, and they say they don't know why.

Instead, according to a lawsuit they've brought against Bank of America, they are now more than $8,000 behind on a mortgage that had been current 12 months ago. Each of their credit scores has dropped by nearly 100 points. And, they allege, Bank of America has threatened them with foreclosure.

Whether the Lake Stevens, Wash., couple keep their home may hinge on the outcome of a legal strategy that aims to join struggling homeowners with similar experiences in the HAMP program in a class-action lawsuit against the nation's largest bank. On Sept. 30 in Nashville, a federal court hearing is scheduled to consider consolidating the Sopers' case with more than a dozen others against Bank of America.

Similar lawsuits, also seeking class-action status, are pending against other major servicers such as JPMorgan Chase and Wells Fargo. Taken together, the cases threaten to amplify a growing public frustration with mortgage servicers' treatment of HAMP borrowers and HAMP's modest results. Permanent modifications, which lower mortgage payments to 31% of a borrower's pretax monthly income for five years, have been given to only about a third of the 1.3 million borrowers in trial plans since the program's launch in April 2009.

Most of the lawsuits allege that the three- or four-month trial payment plans are contracts, and that Bank of America and other servicers broke them by not giving permanent modifications to homeowners who made their trial payments on time and provided the necessary documentation.

Servicers have asked courts to dismiss some of the cases, saying the trial plans are not contracts. Bank of America, which says it plans to seek dismissal of the Soper case, argues in a court filing in a similar case that it must consider borrowers for a HAMP modification, but that it has discretion in granting permanent modifications.

The bank also argues that homeowners have no case because courts have dismissed earlier HAMP-related lawsuits against mortgage servicers. Those cases claimed that in denying some homeowners modifications, the servicers had breached the contracts they made with the Treasury Department when they agreed to participate in HAMP. Courts said homeowners could not sue on those grounds because they weren't parties to the contracts between the government and the servicers.

Lawyers for homeowners say they are now making a different legal argument: that Bank of America and others broke contracts made directly with homeowners.

"Borrowers have said we should be able to enforce the contract between Treasury and mortgage servicers, and many courts have rejected that. Our cases are the first filed that touch on a contract between servicers and borrowers," says Kevin Costello, a lawyer with Roddy Klein & Ryan in Boston, which represents homeowners in cases against Bank of America, JPMorgan Chase and Wells Fargo.

"This litigation is spreading all across the country. People have been relying on a promise all along, and then they get a denial. Then they find themselves in that much worse of a hole," he says.

Many homeowners could be affected: Nearly 620,000 trial modifications since spring 2009 have been canceled, according to an Aug. 20 Treasury report.

Chronicles of delays

The lawsuits allege servicers are purposely denying permanent modifications and keeping loans in default so lenders can profit from heftier late fees and other charges. Court filings provide detailed chronologies of borrowers who allege that over periods of months, they repeatedly sent banks requested documents that the banks said they didn't receive, made inquiries that went unanswered, and received promises of help that were later contradicted or denied by other representatives.

"Bank of America has serially strung out, delayed, and otherwise hindered the modification processes that it contractually undertook to facilitate when it accepted" billions of dollars in government bailout funds in 2008, the Sopers' complaint alleges.

By failing to live up to its obligations, according to the court filing, "Bank of America has left thousands of borrowers in a state of limbo — often worse off than they were before they sought a modification from Bank of America."

The Sopers' complaint alleges that Bank of America customer service representatives are instructed to mislead homeowners who call to inquire about loan modifications they've applied for. The complaint, citing information provided by unnamed former employees, says "representatives regularly inform homeowners that modification documents were not received on time or not received at all when, in fact, all documents have been received."

When homeowners are denied permanent modifications, even those who were current before going on reduced-payment trials are considered in default, and servicers tell them they must immediately pay the difference between their trial payments and their higher former payments to avoid foreclosure, according to the Sopers' complaint and others.

Borrowers' mortgage debt in default rises further the longer they stay in trial plans.

By making trial payments during and after the plan's scheduled end, the Sopers' complaint alleges, they "forgo other remedies that might be pursued to save their homes" such as restructuring their debt by filing for bankruptcy, or pursuing other ways to deal with their default, such as selling their homes.

Foreclosure proceedings have started against some borrowers while they were on trial plans, violating a Treasury directive, according to the lawsuits. Homeowners' credit scores have also been damaged when servicers cancel trial plans, then report the amounts in default to credit bureaus.

Some court filings claim bank employees have demanded upfront fees to start consideration of a modification — in violation of HAMP rules — or told homeowners to stop paying mortgages in order to start a trial modification. The Sopers' complaint alleges an unnamed homeowner was illegally asked to pay $1,400 upfront to Bank of America to be considered for a modification.

In another case, Alex Lam of New York alleges he was told he could only be considered for a HAMP trial modification if he stopped paying his mortgage for several months, according to a lawsuit filed in U.S. District Court in Brooklyn against JPMorgan. He skipped two months of payments in 2009 and says he was denied a permanent modification. JPMorgan declined to comment.

Homeowners' lawyers say there is no effective way to appeal mortgage servicers' decisions because Treasury has no ability to overturn a decision.

Watchdogs' criticisms

Government watchdogs, too, have raised similar criticisms about the HAMP program, as well as about servicers' performance and Treasury's oversight.

The Congressional Oversight Panel, which oversees the government fund that pays for HAMP, said in an April report it "is deeply concerned about the unacceptable quality of the denial and cancellation reasons, and strongly urges Treasury to take swift action."

A Government Accountability Office report in June found servicers were erroneously denying permanent modifications to some homeowners because servicers were inaccurately applying a formula used to determine if the value of modifying the mortgage was greater than the proceeds from foreclosing. The number of homeowners who had been wrongly denied could "range from a handful to thousands."

When errors have been found, Treasury says, it has made servicers go back and fix problems, and re-do their work as a check on their decision-making. It also says that 45% of those who started trials but were ineligible for permanent adjustments received an alternative modification through their servicer. Fewer than 2% have gone to foreclosure sale, according to Treasury.

Some homeowners say they've already lost their homes to foreclosure because a permanent HAMP modification was denied to them.

Jennifer Voltaire, 33, of Medford, Mass., alleges Wells Fargo approved her for a trial HAMP modification, which lowered her payments starting in December 2009, according to court filings in U.S. District Court in Massachusetts. Voltaire is a co-plaintiff in the case.

But after making regular payments, Voltaire was told in May that she was being taken out of the HAMP program and was $40,000 in default, the lawsuit alleges. After she protested, Wells Fargo agreed to reconsider her for a HAMP modification, according to the complaint, but in July, the bank took possession of the home.

"I was literally crying my eyes out," Voltaire says. "I put everything I have into this house, into getting my kids out of the projects. That's the part that really hurts. My kids could look at me like I failed."

Wells Fargo agreed not to sell her house pending further court action. Voltaire is still staying there and making her trial plan payments.

In its motion to dismiss the lawsuit brought by Voltaire and others, Wells Fargo said the plaintiffs have not adequately shown that their trial modifications were contracts to enter into permanent modifications. It says homeowners benefited from being able to make reduced monthly payments while staying in their homes.

Treasury Department officials say homeowners in HAMP trial plans are not promised permanent modifications.

But the Soper lawsuit and others quote language from some trial plan agreements that states: "If I am in compliance with this trial period plan and my representations ... continue to be true in all material respects, then the servicer will provide me with a Home Affordable Modification Agreement ... that would amend and supplement the mortgage on the property, and the note secured by the mortgage."

"They get a letter from the bank that says, 'If I comply, I'm entitled to a HAMP modification.' That's a contract. The bank has not performed under the contract," says Steve Berman, a lawyer with Hagens Berman Sobol and Shapiro in Seattle, who represents the Sopers and other homeowners in HAMP cases.

Evolving rules

The Obama administration's rapid launch of HAMP and its changing guidelines since then may have contributed to the program's administrative confusion. When HAMP began in 2009, servicers enrolled borrowers in trial modifications without verifying income or financial hardship. That brought immediate financial relief to more people, but ineligible homeowners were not weeded out until they completed trial plans. In June, the government began requiring participating servicers to verify applicants' income and financial hardship before starting trials. Treasury says that has improved the rate of conversions to permanent modifications.

"The HAMP program was an unprecedented response to an enormous crisis in this country's housing market. The administration needed to act quickly." says Phyllis Caldwell, Treasury's chief of the homeownership preservation office.

Meanwhile, the number of homeowners claiming improper denials of HAMP modifications is climbing.

One is Peter Salinas, 52, who struggled to pay his mortgage after the economy collapsed and his wife developed cancer. He appealed to his lender for help.

Salinas says he felt elated last year when he received a HAMP trial modification slashing $500 off his monthly payments. But later, he was told he made too much money to qualify for permanently reduced payments, he says. Wells Fargo threatened foreclosure if he didn't pay $9,000, the difference between his original mortgage and what he paid during the trial.

His servicer, Wells Fargo, declined to comment on his situation. Salinas is working with Gulfcoast Legal Services, a not-for-profit civil legal aid office, that says it is preparing a lawsuit against the lender.

"I was convinced I was doing everything right," says Salinas, a reporter for an automotive trade publication who lives near Bradenton, Fla. "I wasn't trying to walk away from this mortgage. It's just infuriating."