Rescission Update: The Notice and the Response

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 The challenge is getting people to accept the simplicity of the specific statutory procedures contained in the statutes governing TILA Rescission. The most common mistake I see is that the borrower justifies the rescission with all sorts of factual allegations in their notice of rescission. In so doing they may have set the stage for their undoing.

Where the notice of rescission contains too much information it raises issues on its face that might cause a problem. There is  confusion raised between whether they are invoking common law rescission — where they must file a suit, allege and prove fraud — and TILA rescission, which does not require a lawsuit and where the borrower has no obligation to give reasons. The rescission letter as framed often raises certain issues regarding the statute of limitations and implies that the rescission is to be effective when a judge agrees with the reasoning in the letter. TILA rescission does not require anyone to agree or any Judge to enter an order. Such letters as I read them seem to invoke TILA rescission but then raise issues about common law rescission.

The reason why the Jesinoski decision was so short and the decision was unanimous is that Congress set forth an unambiguous specific statutory scheme just like state legislatures set forth a specific statutory scheme in non-judicial foreclosures. First the notice on day 1. Then the duty to comply with rescission on the date of receipt and continuing for 20 days. After the 20 days from receipt has expired the recipient is in violation of the statute and having failed to challenge the rescission by operation of law (i.e., a lawsuit) they have waived their defenses — same as the borrower in non judicial foreclosure when they fail to file suit within the prescribed window of time. And finally when they fail to comply with statutes for over one year, they lose any right to collect on the debt.

So the TILA rescission is effective upon mailing. That works by operation of law and can only be undone by some other operation of law. And the window for challenging the rescission is limited to the 20 day period in which the “lender” must comply with the the three duties provided by statute — return of the cancelled note, filing a release and satisfaction of the mortgage or deed of trust, and payment of all money received or paid as set forth in the TILA statute.

Keep in mind that the statute has a provision for the borrower to invoke a legally binding effect in a non-judicial procedure (mailing a letter) but that the TILA statutes does NOT provide for any lender, creditor or servicer to contest the rescission by non-judicial means (i.e., a letter stating that the rescission is rejected or denying the reasons for the rescission or stating that the the statute of limitations has run).

NOTE: Some may argue that I am interpreting the statute, which is equally impermissible. The argument is that the 20 days relates only to compliance with the three duties under TILA rescission. Those arguing this point would say that the statute provides the ONLY remedy available during the rescission process, to wit: compliance with the three duties and then getting repaid for the principal amount that was loaned. Under this theory no action could stop the rescission, judicial or otherwise. The “lender” could probably be allowed to file an action for damages for “wrongful rescission.” But they would faced with the problem of standing — i.e., disclosing and proving the money trail to show they were injured by the rescission. So the argument is that since the statute provides no process for challenging the rescission, which is the intent of Congress in the statute, that there can be no judicial or non-judicial procedure to stop it. They may be right. As I read the statute, not even the borrower could make the rescission non-effective without a separate and new agreement creating a new loan contract.

People ask me where does it say that they only have 20 days? (The more relevant question is whether the “lender” has ANY opportunity to challenge the rescission, which is NOT provided by TILA statutes but I think is implied in order to satisfy due process). The answer is that the statute, the Supreme Court and the Regulation Z all say that the loan contract is cancelled, the note is void and the mortgage is void as of the date that the notice of TILA rescission is mailed. So the answer to the question is that the 20 day period is the only period of time in which the duty to comply is ticking away. Justice Scalia said in no uncertain terms that the statute is not ambiguous and therefore may not be “interpreted.”

Since the rescission is effective by operation of law then that can only mean that there are no contingencies about the rescission which could interfere with its effectiveness. And that is exactly what Justice Scalia said.  Any attempt to raise “defenses” to rescission after 20 days would, if allowed, render the rescission NOT effective by operation of law until a judge reviewed it. Any Judge so ruling would be over-ruling the US Supreme Court.

PRACTICE NOTE: Lawyers for the banks and servicers are picking up steam on their attempt to use fear and intimidation about rescission. They are calling borrowers and opposing counsel and essentially saying “Great! When do we get paid?” This is intended to undermine confidence of the borrower and the lawyer for the borrower. The fact is that the statute is very clear and it is unambiguous as stated by a unanimous US Supreme Court — the “lender” must be in compliance with all three duties BEFORE they can demand payment and they cannot demand payment of finance charges.

In order to make demand for payment they must fulfill four requirements: (1) less than one year as elapsed since the notice of rescission (2) they have already returned the cancelled original note (3) they have already filed a release adn satisfaction of the mortgage or deed of trust int eh county records and (4) they have already paid the borrower all money ever paid on the loan, including interest, principal, fees, and compensation paid to anyone in the origination of the loan. Note that the last issue is subject to a Qualified Written Request (RESPA 6) or lawsuit in which enforcement of the rescission is sought. In that sense rescission is the ultimate discovery tool — allowing the borrower to prove behind the snowstorm of paperwork that is used by the banks and service to process illegal foreclosures.

THE LAWSUIT FOR ENFORCEMENT MUST NOT BE A LAWSUIT THAT SEEKS TO MAKE THE RESCISSION EFFECTIVE. THE RESCISSION IS ALREADY EFFECTIVE BY OPERATION OF LAW. DON’T RAISE THE ISSUE THAT ONLY THE BANKS AND SERVICERS SHOULD BE RAISING. THE LAWSUIT SHOULD SIMPLY STATE THAT THE RESCISSION WAS SENT AND RECEIVED  AND THAT THE BORROWER IS SEEKING AN ORDER COMMANDING THE “LENDER(S)” TO COMPLY WITH THE THREE MAIN DUTIES DESCRIBED IN THE TILA STATUTES.

BUT STRATEGY PLAYS A PART HERE: REMEMBER THAT WHEN THE RESCISSION IS MAILED THERE IS NO LOAN CONTRACT, THERE IS NO NOTE AND THERE IS NO MORTGAGE — BUT AFTER ONE YEAR THERE IS NO DEBT EITHER. FILING AN ENFORCEMENT ACTION INVITES THE OPPOSITION TO SET FORTH THE CHALLENGES AND DEMAND THAT THE RESCISSION SHOULD BE VACATED. THAT FIGHT WILL CENTER AROUND WHETHER (A) THE 20 WINDOW IS TO BE STRICTLY CONSTRUED AND (B) PROBABLY PREVENTS THE BORROWER FROM ESCAPING THE DEBT UNLESS THE “LENDER(S)” ARE STILL IN NON COMPLIANCE AFTER ONE YEAR FROM DATE OF THE RESCISSION.MANY RESCISSION NOTICES WERE SENT YEARS AGO. BY OPERATION OF LAW THERE WAS NO MORTGAGE OR DEED OF TRUST. BY OPERATION OF LAW, AS I READ IT, THERE IS NO LOAN CONTRACT, THERE IS NO NOTE, THERE IS NO MORTGAGE AND THERE IS NO DEBT; BUT IT MIGHT ALSO BE TRUE THAT THE FORECLOSURE SALE WAS VOID AND THAT THE HOMEOWNER LEGALLY STILL OWNS THE PROPERTY. ANY ACTION TAKEN UPON THE USE OF A VOID INSTRUMENT IS ALSO VOID. 

In litigation, the main battle is going to be on the issue of standing. The Banks and servicers will a tempt to use the (now void) note and mortgage for standing just as they do in foreclosures. But here is the rub: with the loan contract cancelled by operation of law, and the note and mortgage being void by operation of law, they can’t prove standing the same way they do in foreclosure actions (which I would argue they shouldn’t be allowed to do anyway). They can’t use the VOID note and mortgage or loan contract as the basis for allegations and proof of standing. They can ONLY prove standing by showing the money trail. They must come out from behind the curtain and show the court that they have an economic interest in the transaction in order to complain about three rescission of the loan contract, the note and mortgage. In order to plead they must state that the rescission was sent and received. The Supreme Court and the statues and Regulation Z take care of the rest rendering the loan contract, note and mortgage void.

Note also that the arguments about why they should not have to show the actual money trail underscores the reasons for the rescission and potentially raise the specter of equitable tolling because they are still trying to hide the facts from the borrower.. They are essentially arguing a position that states that they can use void instruments as the basis for a claim for relief and that they should not be forced to show the money trail — something they cannot do because is there no money trail in their chain.

29 Responses

  1. Ok, I did the Rescission. They received the letter on February 14, and of course they responded with the normal letter that I was beyond the 3 years and they will not honor the rescission. I received the response on March 14. So what is my next course of action?

  2. Can someone assist me with an issue. I submitted a Rescission with all the required documents, but having trouble getting it recorded in Baltimore County public records. Any ideas on how I can get it recorded? James Smith, jsmith5915@msn.com. 443 677 2799. Thanks

  3. David Belanger, do you have a good template of a Rescission Letter? Also did you send the letter after the 3 year period? James, jsmith5915@msn.com, 443 677 2799. Thanks

  4. This is all great discussion, but can you file a rescission if you are beyond the 3 years? jsmith5915@msn.com, 443 677 2799. James Smith

  5. Can someone help me out here, I received a notice of acceleration from Wells Fargo and I think they are going to be trying to foreclose on my second mortgage of a securitized loan which has all kinds of illegal issues. Can someone explain to me if I can use Rescission as a defense to prevent the foreclosure. I’m in Maryland a Non Judicial State. Can someone explain in laymans terms what is rescission? Can I afford to do it? Will I need an attorney? Where can I find an example to do it myself and who should I send the notice to. The loan was closed back in 2005, but since then there have been fraudulent DOT’s filed as close at 3 to 4 years ago. Please assists. James (jsmith5915@msn.com) 443 677 2799. Thanks

  6. am having my lawyers put it on my property records. it was a email sent from ocwens foreclosing attorneys, office. haven’t herd anything from them for 2months now.

  7. “The insurer filed suit in 2011 to recoup the money it had paid to cover Flagstar’s MBS losses.” Trillion dollar question: WHAT bank losses? On default swaps? What? The Prospectus spells out myriad risks in buying derivatives, so the risk of things like early payoffs and defaults is assumed by the deriv buyers. WHAT was Flagstar (et al) insuring? This has got to be 101, but I still don’t know the answer. Someone here must.

  8. David Belanger,

    Is that real?
    If so, my utmost congratulations to you!

    Trespass Unwanted

  9. jg

    I concur. Give them nothing.

    Trespass Unwanted

  10. NG: THE LAWSUIT FOR ENFORCEMENT MUST NOT BE A LAWSUIT THAT SEEKS TO MAKE THE RESCISSION EFFECTIVE. THE RESCISSION IS ALREADY EFFECTIVE BY OPERATION OF LAW. DON’T RAISE THE ISSUE THAT ONLY THE BANKS AND SERVICERS SHOULD BE RAISING. THE LAWSUIT SHOULD SIMPLY STATE THAT THE RESCISSION WAS SENT AND RECEIVED AND THAT THE BORROWER IS SEEKING AN ORDER COMMANDING THE “LENDER(S)” TO COMPLY WITH THE THREE MAIN DUTIES DESCRIBED IN THE TILA STATUTES.”

    Right on, Neil!
    If I were writing a rescission letter today, I would say something like
    “to the extent a valid and legally binding loan agreement exists, I rescind blah blah” so as to not let the bankster argue I admitted anything (?)

  11. Subject: save important news ocwen
    Date: Mon, 4 May 2015 16:08:14 -0400
    ——– Original Message ——–
    Subject: RE: URGENT!!! Orlans Files#: 1895527
    From: Information ORLANDS MORAN,PLLC
    Date: Mon, May 4, 2015 12:38:15 -pm
    To: David Belanger, POA ,
    Orlans Moran File Number: 189.5527

    There is currently no sale scheduled for this property, the foreclosure sale that was schedule for may 5, 2015 at 1200 PM, has been
    Canceled by our office, we were told by OCWEN to stop any further and future actions on this property. That William a Marshall SR, and
    Joanna l Belanger, had as of the 4 march 2015, rescinded the mortgage contract and mortgage note. and that OCWEN LOAN SERVING,LLC
    Has accepted the rescission, along with WELLS FARGO BANK,N.A. AS TRUSTEE FOR GMACM MORTGAGE LOAN TRUST 2006-J1. There will no
    Further actions taken, NOW and in the FUTURE will be taken by either party on this property, because of the acceptances of both parties to the
    Rescission of the loan contract, mortgage, and note, dated November 8 , 2005. It has come to our attention that the loan contract, and mortgage,
    and mortgage note , has not been CONSUMMATED by the TRUE LENDER , THAT THE TRUE LENDER OF ANY AND ALL MONEY PAID TO ALL PARTY’S TO THE MORTGAGE TRANSACTION, THAT WAS GIVEN TO CLOSING ATTORNEY, WAS NOT GMAC MORTGAGE CORP, GMAC MORTGAGE CORP did not fund the loan contract or mortgage , and the mortgage note. The Truth in Lending Act (TILA ), 15 U.S.C. 1601 et seq, enacted on may 29, 1968, as title I of the Consumer Credit Protection Act (pub. L. 90-321 ). The TILA, implemented by Regulation Z (12 CFR 1026 ) , became effective July 1, 1969. it has come to our attention that the required DISCLOSURE
    Were never given to William a Marshall , SR, and Joanna L. Belanger, prior to and during or afterwards the closing date of November 8, 2005. By the proper
    Parties, and true lender or creditor of the mortgage contract, and note, Dated Nov 8, 2005.
    ORLANS MORAN PLLC
    P.O. Box 540540
    Waltham, MA 02454

    P 781 790 7800 | F 781 790 7801

  12. Monoline End Games: String of Legal Wins Will Snowball Until Settlement
    Posted on July 31, 2012 by igradman
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    Last week, I wrote about a few developments that should boost RMBS litigation recoveries, especially for bond insurers – Judge Crotty’s summary judgment decision in Syncora v. EMC (JPMorgan) and Syncora’s subsequent settlement with BofA, resolving all of the parties’ ongoing relationships. It appears I’m not the only one who has concluded that banks may need to reassess their potential payouts as a result of recent legal setbacks.

    In this July 27 client alert, major financial services firm O’Melveny & Myers, which represents BofA in MBIA’s putback suit in New York, addressed the impact of Crotty’s Opinion [hat tip Manal Mehta from Sunesis Capital for passing this along]. While the alert is short and worth reading in its entirety, the gist of O’Melveny’s conclusion is as follows:

    In light of a recent federal court ruling, banks may wish to reevaluate litigation risk from plaintiff insurers claiming injury from alleged breaches of representations and warranties regarding mortgage securitization notes that they insured…

    Institutions facing such lawsuits may wish to re-evaluate their exposure, and possibly adjust reserves set aside to cover such risks, based on the type of plaintiff and the specific language of the securitization agreements at issue.

    Hold the phone – so BofA’s own law firm in its putback litigation with MBIA is publishing an alert saying that banks may need to adjust their loss reserves associated with monoline putback litigation? This is essentially an admission that the firm sees the tide turning against the banks in these suits. Shouldn’t this have generated some serious pushback from O’Melveny’s powerful client?

    Short answer: yes. According to Mehta, this alert was pulled from O’Melveny’s website shortly after publication, only to be re-posted today. We can only speculate as to why the alert was pulled and then re-published (without significant revision), but I can imagine that there were a few heated phone calls in between.

    Regardless, now that we finally have a definitive decision from a respected court on the proper standard for mortgage putbacks, we have enough guidance to begin discussing RMBS litigation end games in earnest. Today, we’ll begin by looking at the bond insurer suits.

    These, along with mortgage insurer suits, were some of the earliest filed pieces of RMBS litigation and have been prosecuted aggressively since the onset of the mortgage crisis by some of the most skilled and aggressive private legal teams in the business. And for good reason: the monolines issued what are known as “financial guaranty” policies, which included a guarantee that insurers would make policy payments if losses mounted; they could not deny claims or rescind coverage.

    This means that bond insurers have already suffered massive, company-crippling losses as a result of insuring pools of misrepresented loans, and have been forced to pursue years of contentious litigation just to try to recover the funds they paid out. The good news for them, is that after 4+ years of litigation, they’re finally beginning to see the light at the end of the tunnel.

    Monoline End Game Scenarios

    As I mentioned at the top of this article, Syncora and Countrywide just reached a settlement of all their outstanding RMBS litigation and other issues, in which Syncora will receive a cash payment of $375 million and a return of certain of its preferred shares, surplus notes and other securities. It’s no coincidence that this settlement comes on the heels of several wins for the monolines in their suits against the major Wall St. banks. It demonstrates that the banks (or at least Bank of America), are beginning to realize that the bond insurers’ claims in these suits are potentially expensive and difficult to defeat. This settlement, in conjunction with BofA’s settlement with Assured Guaranty (AGO) back in April of 2011 and its proposed settlement of investor putback claims initiated in June 2011, show that BofA is making a concerted effort to put legacy Countrywide liabilities behind it.

    This bolsters my long-held view that the most likely end game scenario for the monolines consists of party-by-party settlements with their various bank counterparties that address all of the outstanding legal issues between the parties. As I’ve discussed in the past, the last thing that an issuing bank wants is for one of these cases to go to trial and to see the parade of horribles that the monoline will trot out before the factfinder, showing clear breaches of underwriting guidelines time and time again. Not only would such a trial be long and embarrassing, but it would open up the banks to paying upwards of 75-80 cents on the dollar of losses to the insurers, rather than the 25-30 cents they might be able to pay in settlement.

    Of course, the tougher questions surround the timing and the ultimate size of these potential settlements. If we could get our arms around the size of prior settlements, this might help give us a ballpark of the size of the settlements to come. In my prior article on the Assured Guaranty settlement (at item No. 4), I noted that based on BofA’s estimates, they were covering about 55% of AGO’s losses. The Syncora-Countrywide settlement is much more difficult to parse as the deal, according to Syncora’s press release was part of “an effort to terminate other relationships between the parties,” aside from simply the putback disputes. My guess is that the putback disputes constituted the bulk of the outstanding liabilities, but it’s difficult to assess the exact proportion, as well as the value of the other consideration received by Syncora.

    What we do know is that in the five deals that were the subject of Syncora’s lawsuit against Countrywide, Syncora had already paid out $145 million in claims to policyholders and had received another $257 million in claims as of the filing of the Amended Complaint. That’s $402 million in existing claims, and future losses and claims in those deals could drive that number even higher. Plus, the settlement covered nine other MBS Trusts not at issue in the lawsuit. Barclays projected out the lifetime losses for Syncora in those trusts and reached a figure of up to $1.4 billion (though I know it’s hard to trust anything Barclays says since the emergence of the LIBOR scandal, other commentators have checked Barclay’s work, and it appears to hold up). Assuming this is a reasonable estimate, and putting aside the value of the other consideration given to Syncora and the value of the non-RMBS liabilities it released, the $375 million cash payment works out to about 27 cents on the dollar of claims.

    So what does this mean other monolines, such as MBIA, might receive in settlement? In my opinion, Syncora’s settlement with Countrywide merely sets a floor for MBIA’s case against Countrywide – that is, it is the minimum amount per dollar of claims that MBIA can expect to receive from settling that case. This is because MBIA is in a better position in many respects than Syncora.

    For one, while Syncora claimed to have found approximately 75% of the loans it had reviewed to be in material breach of Countrywide’s reps and warranties, MBIA has alleged that over 90% of the loans in the deals it insured were materially defective. A higher breach rate means a potentially higher judgment per dollar of claims should the putback claims go to trial, driving settlement values higher. The fact that MBIA has actually sued on all of its Countrywide transactions, whereas Syncora only sued on 5 of 14, implies that MBIA’s deals may have been worse across the board, further elevating settlement projections.

    MBIA is also further along in its case against Countrywide/BofA than Syncora was, having conducted significant potentially damaging discovery on issues such as Countrywide’s internal fraud reporting and successor liability. MBIA is on track to present its summary judgment motion on Countrywide’s liability (referred to as “primary” liability) on August 31, and its summary judgment motion on BofA’s liability (referred to as “successor” liability) on September 21. BofA is keen to avoid even the presentation of such motions by MBIA because they will publicly disclose (to the extent the information is not treated as “confidential” and sealed) all facts that MBIA has uncovered in support of its positions.

    This is especially true with respect to MBIA’s motion on successor liability, as the facts MBIA will use to establish that BofA should be on the hook for Countrywide’s liabilities could be used by any plaintiff suing Countrywide and wishing to bring BofA into the case as a guarantor. That is, the facts supporting successor liability in MBIA’s case will be directly applicable to every other plaintiff’s case for successor liability against BofA. Apparently recognizing this, just this week MBIA asked the Court for permission to file a motion lifting the confidentiality restrictions on certain documents received in discovery. MBIA’s attorneys know that the threat of public disclosure of items like Brian Moynihan’s deposition transcript may be the best leverage they have to force BofA to the negotiating table.

    Finally, MBIA has filed a fraud claim against BofA that is fairly well developed. This claim has survived a motion to dismiss (and appeal of that decision) and a motion for partial summary judgment on loss causation. Should that claim be successful, MBIA could receive compensatory damages for the full amount it has lost in connection with insuring the Countrywide trusts at issue (not tied to any breach rate of the underlying loans) plus punitive damages of up to several times compensatory damages. Though punitives are rarely awarded, the treat of punitives will certainly increase MBIA’s settlement leverage (and what better case for the imposition of punitive damages if Countrywide is shown, as MBIA suggests, to have been engaged in the systematic encouragement and coverup of mortgage fraud?).

    All this leads me to believe that MBIA will be able to force BofA into a much larger settlement per dollar of claims than the one Syncora received (the same goes for Ambac in its case against EMC/JPMorgan, as it has uncovered significant evidence of a fraudulent “double-dipping” scheme in that case). Of course, MBIA also has to contend with BofA’s litigation counterweight, in the form of its Article 78 and plenary actions challenging MBIA’s Transformation. But as the Article 78 decision seems likely to go against BofA (and will be appealed, regardless), and the plenary action is falling way behind the putback action due to inactivity during the last several months, MBIA will likely feel as though it has all the leverage when it comes time to seriously talk settlement.

    According to MBIA’s first quarter 10-Q, the bond insurer has incurred $4.8 billion of losses on its portfolio of insured first- and second-lien RMBS deals. The monoline has also booked $3.2 billion in expected recoveries from putbacks (it has booked no expected recoveries from its non-contractual claims). That works out to a 66.7% expected recovery rate per dollar of incurred losses. This would be higher than the global settlements Syncora and AGO struck with BofA, but given MBIA’s superior position, at least in its BofA case as discussed herein, I can’t say those estimates are unreasonable.

    In fact, I think MBIA would recover a much higher percentage of its losses should it proceed to trial against counterparties like BofA. The insurer could recover compensatory damages at 100% of losses if it wins its claims for fraud or rescissory damages, and damages in the range of 75% of losses if it’s forced to go the putback route, as my experience in these types of cases leads me to believe that at least 80% of MBIA’s alleged ineligible loans to be upheld by the factfinder. Compared to these end game scenarios, a settlement in the 66% range may begin to look attractive as MBIA continues to pile up victories in its litigation.

    This brings me to probably the tougher question on monoline end games – timing. Settlement timing is always difficult to estimate since so many factors are at play. But there are certain points in litigation that I term “inflection points” – junctures at which settlement becomes more likely because of the threat of adverse legal developments. The presentation of MBIA’s summary judgment motions in its case against Countrywide/BofA (especially the one on successor liability) create just these sorts of inflection points. The time between when the summary judgment motions are fully briefed and Judge Bransten issues her rulings also constitutes an inflection point, as BofA may feel pressure to avoid yet another scathing Bransten decision. Based on these upcoming inflection points in the case, I will go out on a limb and say that MBIA’s litigation against BofA is likely to settle before the end of this year.

    This timing will be different for each monoline action depending on the individual circumstances, but what they all have in common is that they all are very likely to settle before trial. Given the lack of viable defenses that banks have at their disposal, and the parade of damaging evidence that will paraded before a factfinder should trial ensue, I don’t see how any financial institution can logically allow any of these cases to go to trial. Doing so would only expose the banks to potentially devastating precedent and damage awards, which they call ill afford at this time.

    There are important differences between the monoline cases and the cases of RMBS investors, the other major group of plaintiffs attempting to recover their losses from the major banks. Stay tuned over the next week as I tackle those differences and the status of investor recovery efforts in my next installment in my series on end game scenarios.

    About igradman
    I am an attorney, consultant, book editor, and one of the nation’s leading experts on mortgage backed securities litigation. I author The Subprime Shakeout mortgage litigation blog, am the Managing Member of MBS consulting firm IMG Enterprises, LLC, and am the editor of the newly released book, “Way Too Big to Fail: How Government and Private Industry Can Build a Fail-Safe Mortgage System,” by Bill Frey. Follow me on Twitter @isaacgradman

  13. Assured’s MBS Win May Force Wave Of Bank Settlements
    By Jake Simpson

    Law360, New York (February 7, 2013, 7:51 PM ET) — Assured Guaranty Corp.’s $90.1 million victory over a Michigan bank it accused of misrepresenting the quality of roughly $900 million in residential mortgage-backed securities covered by Assured could open the floodgates for similar litigation and leave global banks facing comparable suits far more inclined to settle, experts said Thursday.
    After a 12-day bench trial in October, U.S. District Judge Jed S. Rakoff on Tuesday awarded Assured $90.1 million in damages in New York federal court, finding Flint, Mich.-based Flagstar Bank FSB had breached its contracts by misleading Assured about the mortgage loans. The insurer filed suit in 2011 to recoup the money it had paid to cover Flagstar’s MBS losses.

    Flagstar said in a statement Tuesday night that it strongly disagrees with the ruling and will appeal to the Second Circuit, but several attorneys told Law360 on Wednesday that the bank is unlikely to succeed on appeal.

    The case had been viewed by many in the insurance and banking industries as a test case for monoline insurance claims against lenders over alleged loan underwriting defects, attorneys told Law360. While the case was among the smaller suits brought by insurers against lenders for MBS loan deficiencies, Judge Rakoff’s opinion sets a legal precedent that could galvanize insurance companies and dramatically increase liability for several of the world’s largest global banks.

    “I think this decision is sending shock waves through the banking industry,” said Nossaman LLP partner Joan Cotkin.

    The Assured suit is the first putback case between a monoline insurer and a lender to have gone to trial, according to attorneys. In a mortgage putback, the mortgage originator is forced to buy back defective loans from a securities holder or an insurance company.

    Judge Rakoff’s ruling could prompt other monolines to bring a flood of similar MBS contract claims against banks, according to Axinn Veltrop & Harkrider LLP partner Donald W. Hawthorne.

    “This is a green light for putback litigation,” Hawthorne said. “I think a lot of potential plaintiffs have been overly impressed by what they perceived to be the difficulties in bringing this type of claim. This will bring in a lot of plaintiffs who were waiting on the sidelines.”

    The extend of unfiled putback claims is unclear, but Judge Rakoff’s ruling will have a major impact on pending litigation filed by Assured and fellow monolines such as MBIA Inc. Assured has contract suits pending against Credit Suisse AG, UBS AG and JPMorgan Chase & Co., among other lenders, while MBIA in the midst of blockbuster $3 billion litigation against Bank of America Corp. over alleged underwriting violations by Countrywide Financial Corp., which was acquired by BofA in 2008.

    Assured sought reimbursement for the $90.1 million in claims it had paid out to bondholders because of loan defaults. Judge Rakoff largely agreed with the testimony of an Assured expert witness who reviewed a sample of 800 Flagstar-approved loans and found 606 to be materially deficient.

    MBIA’s suit against BofA in New York state court claims Countrywide committed widespread violations of its own underwriting standards in approving roughly 400,000 home loans backing $22 billion in residential MBS. The insurer is seeking reimbursement for the $3.5 billion it has paid to investors in claims.

    MBIA CEO Jay Brown said in a statement provided to Law360 on Wednesday that Judge Rakoff’s opinion relied in part on rulings in MBIA’s favor in the Countrywide case.

    “We were pleased with Judge Rakoff’s decision, as it essentially confirms the merits and strength of our own cases against mortgage originators for breaches of representations and warranties,” Brown said. “While the judge in each case will arrive at their own conclusions, we believe Judge Rakoff’s opinion reflects a careful review of the facts and law and supports the positions we have asserted in our cases.”

    MBIA filed a similar suit against Flagstar in New York federal court in January, accusing it of misleading the insurer about purportedly shoddy loans underlying more than $1.02 billion in MBS, a virtually identical claim to Assured’s.

    BTIG LLC managing director Mark Palmer, an analyst covering the insurance industry, said Judge Rakoff’s opinion increases liability risk for any lender with representation and warranty exposure, which could lead banks or its auditors to call for a concomitant increase in reserves.

    “If there is the perception that risks of increased losses [from monoline putback suits] has increased, then the reserves should be increased,” Palmer said. “Regardless of the fact that the ruling is on appeal, the fact that it occurred should be enough to cause an increase in reserves, which would then inspire a bank to be more willing to settle.”

    Palmer’s sentiments were echoed by MKM Partners LLC senior analyst Harry Fong, who also covers the insurance sector, in a note to clients Wednesday.

    “This is the first actual verdict to be handed down by a court of law, and we believe it should force the remaining defendant banks to reconsider their strategy of fighting the financial guarantors,” Fong said in the note.

    Assured CEO Dominic Frederico said in a statement Tuesday that Judge Rakoff’s decision sets a strong precedent for monoline insurers in RMBS putback cases. The New York insurer likely will attempt to use the ruling to force defendants in its other putback suits, including Credit Suisse, UBS, JPMorgan and Ally Financial Inc., to join in settlement talks, according to Palmer.

    “The key to that approach is convincing [bank] management and auditors that Judge Rakoff’s ruling significantly increases the probability of increased losses related to mortgage putbacks,” Palmer said.

    Insurance and banking experts said the ruling will change the litigation landscape for monolines and banks in MBS putback suits and makes settlements more likely, even if the cost of those settlements are higher than they would have been before Judge Rakoff’s landmark ruling.

    “Any defendant with putback contract claims as a significant part of its case has to view the settlement value of its case as having gone up in light of this decision,” Hawthorne said.

    Assured is represented by Jacob W. Buchdahl, Arun Subramanian, Warren T. Burns and Joseph C. Portera of Susman Godfrey LLP.

    Flagstar is represented by Veronica E. Rendon, Stewart D. Aaron, Susan L. Shin, Daniel M. Kuhn and Monique A. Gaylor of Arnold & Porter LLP.

    The case is Assured Guaranty Municipal Corp. v. Flagstar Bank FSB et al., case No. 1:11-cv-02375, in the U.S. District Court for the Southern District of New York.

    –Additional reporting by Eric Hornbeck and Brian Mahoney. Editing by John Quinn and Chris Yates.
    Related Articles
    Assured’s $90M Win Gives Insurers Ammo Against Banks
    MBIA Hits Flagstar With Suit Over $1B In MBS Deals
    Assured Wins $1B MBS Contract Suit Against Flagstar
    Flagstar Agrees To Pay $110M To Settle MBIA’s MBS Suit
    Flagstar To Pay $105M To End Assured’s MBS Suit

  14. GOOGLE IT, READ IT.

    Deterioration of Monoline
    Insurance Companies and the
    Repercussions for Municipal Bonds

  15. About CFPB? My point repeated by someone – not me!
    How did that happen? I said I know no thing.

    3 hrs but what I wanted to re-iterate is in the first 30 minutes

    http://www.freeconferencing.
    com/playback_nv.html?n=
    /storage/sgetFC/OZ4nw/ulHke

    I broke the link up. with enter key.
    Anyone with the ability to make those three lines one line will hear the information. AI and bots may have some issues if they are not programmed to do that.

    Some people like to bang their heads against the wall.
    Some like to get pity for poor me stories
    and some people don’t know what bread crumbs to follow or meat to eat as they research a problem.

    Discernment is a skill that One develops, no one can give it to anyone.
    We are not their God.

    They that trespass against us are not God over us.

    Trespass Unwanted, Creator, Corporeal, Life, Free, People, Independent, IState, In Jure Proprio, Jure Divino

  16. Reblogged this on California Freelance Paralegal and commented:
    Another blog post by Neil Garfield discussing the notice of rescission and the response. I agree completely with his suggestion not to include a lot of factual allegations in the notice of rescission.

  17. david, could you please send the stuff below to me in one piece?
    Thanks

  18. SUPREME COURT OF THE STATE OF NEW YORK
    COUNTY OF NEW YORK
    – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – x
    FINANCIAL GUARANTY INSURANCE
    COMPANY,
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    :
    Mot. Seq. 001
    Index No. 652914/2014
    Justice Friedman
    Part 60
    ORAL ARGUMENT
    REQUESTED
    Plaintiff,
    – against –
    MORGAN STANLEY ABS CAPITAL I INC.,
    MORGAN STANLEY MORTGAGE CAPITAL
    HOLDINGS LLC, MORGAN STANLEY & CO.
    LLC, as successor to MORGAN STANLEY &
    CO. INC., MORGAN STANLEY, and SAXON
    MORTGAGE SERVICES, INC.,
    Defendants.

  19. Jesinoski we love you 😁

  20. 64. On March 30, 2006, GMACM entered into an Insurance and Indemnity
    Agreement (“I&I Agreement”) with FGIC. The I&I Agreement was executed by FGIC (the
    Insurer of the 2006-HE1 Transaction); GMACM (the Sponsor, a Seller and the Servicer of the
    2006-HE1 Transaction); RAMP (the Depositor for the 2006-HE1 Transaction); Walnut Grove (a
    – 20 –
    Seller); and JPMorgan Chase Bank, N.A. (“JPMorgan”) (the Indenture Trustee). The Bank of
    New York Trust Company, N.A., later became the successor in interest to JPMorgan as
    Indenture Trustee.

  21. GMACM’s Securitizations and Financial Guaranty Insurance Generally

    (1) Financial Guaranty Insurance Policies
    53. To increase the marketability of its RMBS, GMACM from time to time sought
    credit enhancement for its securitizations from FGIC, a financial guaranty insurer, in the form of
    financial guaranty insurance policies. Such financial guaranty insurance policies were generally
    issued to the indenture trustee for the insured securities, for the benefit of the holders of the
    insured RMBS, to insure the risk of shortfalls in cash available to the trust to repay the insured
    securities.

    54. In a typical GMACM-sponsored securitization, including the 2006-HE1
    Transaction, GMACM, as servicer, remits proceeds from the mortgage loans backing the
    securitization to the indenture trustee, along with a servicer’s certificate that details the
    distributions to be made. Then, in accordance with the servicer’s certificate, the indenture
    trustee allocates those funds to the payment of principal and interest due on the RMBS, as well
    as the payment of fees to GMACM and other participants, and in some cases to reserve funds
    and other uses.
    55. The primary source of the funds administered by the indenture trustee is the
    remittance of payments on the underlying loans. Delinquencies by borrowers in making their
    mortgage loan payments, by definition, will reduce cash flows to the trust, which will directly
    impair the ability of the trust to meet its obligations. Delinquencies, if not cured, will eventually
    result in mortgage loan charge-offs, which reduce the aggregate principal amount of the loan
    pool supporting the RMBS. In this manner, high levels of mortgage loan delinquencies and
    defaults can lead to shortfalls in cash available to pay RMBS investors. Such shortfalls result in
    claims on FGIC’s policies.
    56. Under the terms of a financial guaranty insurance policy, like the one FGIC issued
    here, the insurer unconditionally and irrevocably guarantees to the indenture trustee for the
    benefit of the holders of the insured RMBS that, if there is a shortfall in cash available to it to
    make required payments on the insured securities, the financial guaranty insurer will pay the
    amount of the shortfall to the indenture trustee for the benefit of the holders of the insured
    securities.

  22. Get busy on TILA but consult council

  23. Glad you drew attention to that point Louise because though 1635 (f) says three years because it comes under a statute of repose as opposed to limitation..but, Section 1640 (e) of TILA gives one year re SOL and states ” any action under THIS section may be brought …. In any court of competent jurisdiction, within one year FROM THE DATE Of occurrance of the violation.” ( caps mine)

  24. (a) Any Member that sells, transfers, or otherwise disposes of all or substantially
    all of its assets to any entity that is not a Member of the MERS® System, shall, subject to
    applicable federal or state law, regulatory requirements, or other agreements, provide written
    notice of such transaction(s) to MERSCORP Holdings no less than ninety (90) days prior to the
    effective time of such disposition of assets to such non-Member entity. The Member shall
    complete the Resignation of Membership prior to the completion of the disposition of assets to
    such non-Member entity. Notwithstanding the foregoing, the resigning Member shall not be
    required to comply with this sub-section if the acquiring entity submits a MERS® System
    Membership Application (the “Membership Application”) no less than thirty (30) days prior to
    the sale or disposition of assets and subsequently becomes a Member bound by the Governing
    Documents.

  25. everyone should read this.. and homeowner should be saying the same on all the fraud.

    it tells allot.

    SUPREME COURT OF THE STATE OF NEW YORK
    COUNTY OF NEW YORK
    —————————————————— x
    FINANCIAL GUARANTY INSURANCE
    COMPANY,
    Plaintiff,
    -against-
    GMAC MORTGAGE, LLC F/K/A
    GMAC MORTGAGE CORPORATION;
    ALLY BANK F/K/A GMAC BANK;
    RESIDENTIAL CAPITAL, LLC F/K/A
    RESIDENTIAL CAPITAL
    CORPORATION,
    Defendants.
    ))))))))))))))
    Index No. _______
    SUMMONS
    Date Index No. Purchased:
    November 29, 2011
    —————————————————— x
    TO THE ABOVE-NAMED DEFENDANTS:
    YOU ARE HEREBY SUMMONED to answer the Complaint of the Plaintiff herein and
    to serve a copy of your answer on the Plaintiff at the address indicated below within 20 days
    after the service of this Summons (not counting the day of service itself), or within 30 days after
    service is complete if the Summons is not delivered personally to you within the State of New
    York.
    YOU ARE HEREBY NOTIFIED THAT should you fail to answer, a judgment will be
    entered against you by default for the relief demanded in the complaint.
    VENUE: Plaintiff designates New York County as the place of trial. The basis of this
    designation is Plaintiff’s residence in New York County at 125 Park Avenue, New York, New
    York 10017. A further basis of this designation is Defendant GMAC MORTGAGE, LLC’s
    residence in New York County and agreed submission to this venue.
    Ú×ÔÛÜæ ÒÛÉ ÇÑÎÕ ÝÑËÒÌÇ ÝÔÛÎÕ ïïñîçñîðïï ×ÒÜÛÈ ÒÑò êëííðîñîðïï

  26. SECTION 4. Record Title and Possession of Mortgage Files. The Seller hereby sells, transfers, assigns, sets over and conveys to the Purchaser, without recourse, but subject to the terms of this Agreement and the Seller hereby acknowledges that the Purchaser, subject to the terms of this Agreement, shall have all the right, title and interest of the Seller in and to the Mortgage Loans. From the Closing Date, but as of the Cut-off Date, the ownership of each Mortgage Loan, including the Mortgage Note, the Mortgage, the contents of the related Mortgage File and all rights, benefits, proceeds and obligations arising therefrom or in connection therewith, has been vested in the Purchaser

    . All rights arising out of the Mortgage Loans including, but not limited to, all funds received on or in connection with the Mortgage Loans and all records or documents with respect to the Mortgage Loans prepared by or which come into the possession of the Seller shall be received and held by the Seller in trust for the exclusive benefit of the Purchaser as the owner of the Mortgage Loans. On and after the Closing Date, any portion of the related Mortgage Files or servicing files related to the Mortgage Loans (the “Servicing Files”) in Seller’s possession shall be held by Seller in a custodial capacity only for the benefit of the Purchaser. The Seller shall release its custody of any contents of the related Mortgage Files or Servicing Files only in accordance with written instructions of the Purchaser or the Purchaser’s designee.
    SECTION 5. Books and Records. The sale of each Mortgage Loan has been reflected on the Seller’s balance sheet and other financial statements as a sale of assets by the Seller. The Seller shall be responsible for maintaining, and shall maintain, a complete set of books and records for the Mortgage Loans which shall be appropriately identified in the Seller’s computer system to clearly reflect the ownership of the Mortgage Loans by the Purchaser

    .
    SECTION 6. Delivery of Mortgage Notes.
    ————————–
    (a) On or prior to the Closing Date, the Seller shall deliver to the Purchaser or the Custodian, as directed by the Purchaser, the original Mortgage Note, with respect to each Mortgage Loan so assigned, endorsed without recourse in blank, or in the name of the Trustee as trustee, and signed by an authorized officer (which endorsement shall contain either an original signature or a facsimile signature of an authorized officer of the Seller, and if in the form of an allonge, the allonge shall be stapled to the Mortgage Note), with all intervening endorsements showing a complete chain of title from the originator to the Seller. If the Mortgage Loan was acquired by the endorser in a merger, the endorsement must be by “____________, successor by merger to [name of predecessor]”. If the Mortgage Loan was acquired or originated by the endorser while doing business under another name, the endorsement must be by “____________ formerly known as [previous name].” The delivery of each Mortgage Note to the Purchaser or the Custodian is at the expense of the Seller.
    In lieu of delivering the Mortgage Note relating to any Mortgage Loan, the Seller may deliver or cause to be delivered a lost note affidavit from the Seller stating that the original Mortgage Note was lost, misplaced or destroyed, and, if available, a copy of each original Mortgage Note; provided, however, that in the case of Mortgage Loans which have been prepaid in full after the Cut-off Date and prior to the Closing Date, the Seller, in lieu of delivering the above documents, may deliver to the Purchaser a certification to such effect and shall deposit all amounts paid in respect of such Mortgage Loan in the Payment Account on the Closing Date.
    (b) If any Mortgage Note is not delivered to the Purchaser (or the Custodian as directed by the Purchaser) or the Purchaser discovers any defect with respect to a Mortgage Note which materially and adversely affects the interests of the Certificateholders in the related Mortgage Loan, the Purchaser shall give prompt written specification of such defect or omission to the Seller, and the Seller shall cure such defect or omission in all material respects or repurchase such Mortgage Loan or substitute a Qualified Substitute Mortgage Loan in the manner set forth in Section 7.03. It is understood and agreed that the obligation of the Seller to cure a material defect in, or substitute for, or purchase any Mortgage Loan as to which a material defect in, or omission of, a Mortgage Note exists, shall constitute the sole remedy respecting such material defect or omission available to the Purchaser, Certificateholders or the Trustee on behalf of Certificateholders.
    (c) All other documents contained in the Mortgage File and any original documents relating to the Mortgage Loans not contained in the Mortgage File or delivered to the Purchaser, are and shall be retained by the Servicer in trust as agent for the Purchaser.
    In the event that in connection with any Mortgage Loan: (a) the original recorded Mortgage (or evidence of submission to the recording office), (b) all interim recorded assignments, (c) the original recorded modification agreement, if required, or (d) evidence of title insurance (together with all riders thereto, if any) satisfying the requirements of clause (I)(ii), (iv), (vi) or (vii) of the definition of Mortgage File, respectively, is not in the possession of the Servicer concurrently with the execution and delivery hereof because such document or documents have not been returned from the applicable public recording office, or, in the case of each such interim assignment or modification agreement, because the related Mortgage has not been returned by the appropriate recording office, in the case of clause (I)(ii), (iv) or (vi) of the definition of Mortgage File, or because the evidence of title insurance has not been delivered to the Seller by the title insurer in the case of clause (I)(vii) of the definition of Mortgage File, the Servicer shall use its best effort

  27. What about the ruling by the Supreme Court that sort of changed how TILA works. According to the A Man that date is January 13, 2015 could be used as the date to send rescission letter and rescind not the 3 year time period? Yes, not legal advice. Talk with an atty in your state.

  28. 15 USC 1635 (a). And (f)
    Study

  29. Like.
    Only as each case is litigated in the light of jesinoski will we find out if it works for those of us who rescinded before 3 years, yet were forced into litigating for another 3 and counting, i even cited my rescission in my cease and desist letters ( and re their attempts to collect a debt too included) and the lis pendens i placed at the time. Its going to be very messy if i prevail thats for sure.
    Not legal advice – please dont rely on what i blogg research and consult with attorney in your state.

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