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Administrative Process May Provide a Lift to Borrowers
Editor’s Comment: Following on the heals of a similar ruling against JPMorgan Chase, Judge Denise Cote, denied the motion to dismiss the lawsuit of the Federal Housing Finance Agency that overseas Fannie and Freddie.
Simply put the agency is charging the investment banks with intentionally misrepresenting the underwriting standards that were in use during the mortgage meltdown. To put it more simply, the fraud we know that occurred at ground zero (the “closing” table) is being traced up the line to the banks that were pulling the strings and causing the fraud.
The allegations of course are insufficient in and of themselves to use as proof of anything. They are unproven allegations in a civil court suit in Federal Court in Manhattan. BUT there is an interesting argument to be made here that should not be ignored. I did a lot of work in administrative law when I was practicing full-time.
The procedure that any agency follows in filing such a lawsuit is something that should be pointed out when you are making arguments about fraud in the origination or assignments of loans.
In order for an agency to file suit, there must be a “finding” that the facts alleged in the complaint are true. In order for that to happen there must be an investigation and it must be brought before a committee or board for a finding of probable cause.
Normally the finding of probable cause would result in an administrative action brought before a hearing officer that would result in either acquittal of the offending suspect (respondent) or fines, penalties or even revocation of their right to do business with the agency or under the auspices of the agency.
Here the action is brought in civil court which must mean that the findings were strong enough to go beyond probable cause to establish in the findings of the agency that these violations did occur beyond a reasonable doubt. Hence, it could be argued, given the structure and process of administrative actions, that the investment banks have already been found by administrative agencies to be fraudulent.
Then you go to the facts alleged and see what those facts were (see article on JPMorgan denial of dismissal for copy of the complaint). Where there are similarities, you can allege the same thing and apply it to the origination of the loan and the so-called assignments and claims of securitization. AND you can say that there has already been an administrative finding that the fraud occurred, which is persuasive authority at a minimum.
In these cases the investment banks are accused of intentionally lying about the underwriting standards used in origination of the loans — something we have been saying here for years.
That means it was no mistake that they failed to put the name of the real payee on the note and mortgage and it was no mistake that they failed to reference the REMIC or the pooling and servicing agreement which set the terms of repayment, sometimes in direct contradiction to the terms expressed in the note that they induced the borrower to sign. The information was intentionally withheld from the borrower and promptly used with Fannie and Freddie knowing ti was false, as to verifications of value, income viability etc. (see previous post).
In essence the FHFA is saying the same thing that the investors are saying, which is the same thing that the borrowers are saying — these origination documents are worthless scraps of paper replete with deficiencies, lies and misrepresentations, unsupported by consideration and unenforceable.
The defense of the investment banks is that they HAVE been enforcing the notes and mortgages (Deeds of trust). They are saying that since the courts have let most of the cases go to foreclosure, the documents must be valid and enforceable. If improper underwriting standards had been used, or more properly stated, if underwriting standards were ignored, then the borrower would have had a right to rescission, which the courts have largely rejected. It is circular reasoning but it works, for the most part when it is a single homeowner against a big bank.
But when it is institution against institution its not so easy to pull the wool over the judge’s eyes. AND unlike the borrowers, the FHFA is not plagued with guilt over whether they were stupid to begin with and therefore deserve the punishment of taking the largest loss of their lives.
The answer to that is that the banks were only able to “enforce” as a result of the ignorance of the judges, lawyers and borrowers as to the truth behind the facts of each loan origination, assignment etc.
By Jonathan Stempel, Reuters
A U.S. judge rejected bids by Goldman Sachs Group Inc (GS.N) and Deutsche Bank AG (DBKGn.DE) to dismiss a federal regulator’s lawsuits accusing them of misleading Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) into buying billions of dollars of risky mortgage debt.
In separate decisions on Monday, U.S. District Judge Denise Cote in Manhattan said the Federal Housing Finance Agency may pursue fraud claims over some of the banks’ representations in offering materials regarding mortgage underwriting standards.
The FHFA had sued over certificates that Fannie Mae and Freddie Mac, known as government-sponsored enterprises, had bought between September 2005 and October 2007.
Goldman underwrote about $11.1 billion of the certificates, and Deutsche Bank roughly $14.2 billion, the regulator has said.
Michael DuVally, a Goldman spokesman, declined to comment, as did Deutsche Bank spokeswoman Renee Calabro. Trials in both cases are scheduled to begin in September 2014.
In her Deutsche Bank ruling, the judge said that while the offering materials said representations were “preliminary” and “subject to change,” their use suggested that the German bank “fully intended the GSEs to rely on” them.
Meanwhile, Cote rejected what she called Goldman’s “legally dubious” claim not to be liable over prospectus supplements it did not write, saying “it is difficult to square with the fact that the bank’s name is prominently displayed on each.”
She dismissed some claims over representations concerning owner-occupied homes and loan values.
The FHFA became the conservator of Fannie Mae and Freddie Mac after federal regulators seized the mortgage financiers on September 7, 2008.
In May, Deutsche Bank agreed to pay $202.3 million in a separate federal probe, in which its MortgageIT unit admitted it had lied to the U.S. government over whether its loans were eligible for federal mortgage insurance.
Cote said it is too soon to decide liability over MortgageIT activity that predated its 2007 takeover by Deutsche Bank.
The cases are Federal Housing Finance Agency v. Deutsche Bank AG et al, U.S. District Court, Southern District of New York, No. 11-06192; and Federal Housing Finance Agency v. Goldman Sachs & Co et al in the same court, No. 11-06198.
(Reporting By Jonathan Stempel in New York; Editing by John Wallace, Tim Dobbyn and M.D. Golan)
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud Tagged: | administrative process, Denise Cote, Deutsch, Fannie, Federal Housing Finance Agency, FHFA, fraud, Freddie, Goldman, JPMorgan, REMIC