Mortgage Lawsuits Spell Trouble for Lenders

A recent spate of lawsuits has accused mortgage lenders of impropriety or outright fraud at virtually every level of the mortgage process. Moreover, as lenders increasingly find themselves on the losing end, these lawsuits will have important implications for the future of mortgage lending.

Bank of America is currently in the process of resolving all of the disputes surrounding Countrywide Financial, which it acquired during the height of the housing boom. In 2009, it was sued by the state of Massachusetts for originating risky loans without verifying borrowers’ ability to repay the loans. BofA ultimately settled the case in May 2010, and agreed to “$18 million in loan modifications for Massachusetts homeowners, $3 billion in loan modifications for homeowners across the country, and a $4.1 million payment to the Commonwealth.”

However, the Attorneys General from the states of Nevada and Arizona have already filed suit alleging that BofA has failed to live up this agreement, as it “told consumers they would not be foreclosed on while requests for loan modifications were under way, not acting on the modifications within a specific time, making false promises to consumers and potentially selling their homes while they were waiting for decisions.”

Last week, Bank of America finally settled its case with Freddie Mac and Fannie Mae, in which it agreed to repurchase a substantial portion of Countryide mortgage securities, and subsequently write down $2-5 Billion of it. Meanwhile, All State Insurance, which also lost money on investments in mortgage securities, and MBIA, which lost money insuring such securities, have also filed lawsuits. Both allege that BofA deviated from its underwriting standards when it originated such loans. Such claims are supported by an internal Countrywide audit, which found that “approximately 40% of the Bank’s reduced documentation loans . . . could potentially have income overstated by more than 10% and a significant percent of those loans would have income overstated by 50% or more.”

Meanwhile, the State Supreme Court of Massachusetts “affirmed a lower court judge’s ruling invalidating two mortgage foreclosure sales because U.S. Bancorp and Wells Fargo did not prove that they owned the mortgages at the time of foreclosure.” While there was no doubt – as in thousands of other cases – that the borrowers were in default, the lenders failed to convincingly establish proof of ownership at the time of foreclosure. These cases were closely watched by foreclosure defense attorneys around the country, and it is likely that additional cases will now be brought forward.

The upshot is that lenders are finally being held accountable for lax origination/documentation practices that were begun during the housing boom. As if it wasn’t already clear, their operations will continue to be the subject of rigorous scrutiny, and it’s possible that more lawsuits will be brought forward.