Secondary Marketing Litigation Log

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MORTGAGE EXPERT
5 · 11 · 11

Losses suffered on loans traded in the secondary market have prompted some major players to file legal actions that seek repurchases, reversals of court decisions and reimbursement for losses. Among the defendants are investment bankers, title insurers and mortgage originators. But not all of the litigation activity involves big firms.

In Wells Fargo Bank N.A. v. Old Republic Title Insurance Co., the bank was unsuccessful in its attempt to recover the value of what the court termed “seventeen worthless mortgages.” Wells had sought to recover from Old Republic the value of seventeen mortgages it purchased on the secondary market from Financial Mortgage Inc. Financial Mortgage drew on warehouse lines of credit offered by several financial institutions. After warehouse lenders advanced funds to the originator for one loan, it resold the mortgages to secondary investors and used the proceeds to pay back the warehouse lenders.

In May 2004, Wells Fargo entered into a loan purchase agreement with Financial Mortgage to purchase several residential loans secured by a note and deed of trust on real property. However, according to the court’s opinion, the loan failed because Financial Mortgage, through Vijay Taneja, misrepresented that the mortgages were recorded in Virginia’s public records system and provided Wells Fargo with first and exclusive priority over all other creditors.

“Wells Fargo eventually discovered the bitter reality,” the court said. Contrary to the requirements in Wells Fargo’s loan purchase agreement with Financial Mortgage, the mortgages sold to Wells Fargo were not recorded nor free from prior liens. This deficiency left Wells Fargo in an unsecured and/or subordinate position on these loans. As the court noted, “Wells Fargo now possesses the seventeen worthless notes in its residential mortgage portfolio, all of which are presently in default.”

Wells Fargo contended in its lawsuit that TitlePro Inc. acted as Old Republic’s agent when it closed the real estate transactions underlying Wells Fargo’s mortgages and that Old Republic contractually agreed to indemnify Wells Fargo for its losses.

The district court granted summary judgment to Old Republic on all of Wells Fargo’s claims. The U.S. Court of Appeals for the Fourth Circuit affirmed that decision in an unpublished opinion.

Another set of investors have also discovered that today’s secondary market can be quite unrewarding. A federal appellate court has reinstated a lawsuit dealing with allegations that CitiFinancial Mortgage Co.’s non-delivery of loan documents led to two investors being unable to foreclose on a $140,000 Illinois mortgage. Patrick L. Cogswell and Patrick M. O’Flaherty sued CitiFinancial for breach of contract in federal trial court.

CitiFinancial had assigned its interest in a mortgage to the two investors — doing business as “The Patrick Group” — but never delivered the original or a copy of the underlying note. When The Patrick Group tried to foreclose on the mortgage in Illinois state court, its action was dismissed because it could not produce the note. After an unsuccessful appeal of that decision, The Patrick Group filed the breach-of-contract lawsuit against CitiFinancial. The suit was removed to federal court where the district court threw the case out, granting summary judgment in favor of CitiFinancial. The Patrick Group appealed. The appellate court reversed that decision, thus allowing the case by the investors to go forward.

Neither of the attorneys involved in the case answered calls asking for the latest legal developments.

Tampa, Fla., mortgage broker Peter Bakowski was sentenced late last year to 15 years and 8 months in federal prison, the Department of Justice reported. He was also ordered to pay $16.1 million in restitution.

Bakowski allegedly sold the same mortgage to multiple investors — many of them elderly. Around 150 loans and 30 investors were involved in the scheme, which began in 2004 He allegedly promised his investors returns between 10 and 15 percent.

Meanwhile, former Maine mortgage broker Eric S. Murphy Jr. is fighting his July 2010 conviction and has filed a motion for post-conviction review. He is alleging that, because of ineffective assistance of counsel, he was denied the opportunity to fully fight the allegations. Murphy filed the request in February in the Superior Court in Maine in February. The court has not yet ruled on Murphy’s motion.

He was sentenced to nine years of imprisonment with all but five years suspended and ordered to pay restitution to his victims in the amount of $358,000.

Murphy, who was accused of running an investment scam in conjunction with his residential construction loan business from 2006 to 2008, was charged with one count each of securities fraud and forgery and two counts of theft by deception. His mortgage broker license was revoked in April 2009.

No ruling has yet been made in a lawsuit filed in July 2010 by former California attorney general and current Gov. Jerry Brown against Fannie Mae, Freddie Mac and their regulator the Federal Housing Finance Agency. The case was filed to stop the two secondary lenders from blocking the Property Assessed Clean Energy — or PACE — program, which allowed homeowners to pay for energy-efficient improvements through increased property taxes.

The government-sponsored enterprises opposed the program because they can’t buy or guarantee mortgages on properties where counties would have to be paid first if borrowers defaulted. The suit, which was filed in U.S. District Court in Oakland, Calif., asks a federal judge to rule that California law should govern the program.

A letter earlier this year to the FHFA from U.S. Rep. Maxine Waters (D-Calif.) and several other Democratic members of the House questioned negotiated settlements with Bank of America Corp. and Ally Financial. The settlements fixed repurchase liabilities on certain loans guaranteed by Fannie and Freddie.

The Democrats questioned whether the agreements were enough to cover the “real liabilities” to the GSEs and requested details about the $3.3 billion combined settlements.

Moody’s Investors Service warned in a client newsletter earlier this year that BofA’s settlement with Fannie and Freddie does not address uncertainty around claims by monoline insurers and private label investors.

“We expect the cost to resolve those claims will be less than the total cost incurred for GSE claims, and as such is manageable for BofA,” Moody’s wrote. “However, there is a risk that the costs may be substantially higher if unfavorable legal decisions are reached, although we believe it will likely take several years for the litigation to be resolved.”

A federal judge in U.S. District Court for the Southern District of New York has allowed Deutsche Bank AG to proceed with its lawsuit against BofA over losses suffered when Taylor, Bean and Whitaker Mortgage collapsed, WSJ.com reported in March. Deutsche claims BofA filed to secure $1.75 billion in case and mortgages on its behalf.

A lawsuit filed in a Delaware court by Little Rock, Ark.-based Central Mortgage Co. that sought to force Morgan Stanley Mortgage Capital Holdings to buy back mortgages was dismissed, Reuters reported. Morgan Stanley had reportedly repurchased about half of the loans that Central Mortgage itself repurchased from Fannie and Freddie.


Case Citations:
Wells Fargo Bank N.A. v. Old Republic Title Insurance Co.
Case No. 10-1087, Argued: Jan. 27, 2011, Decided: March 1, 2011, Unpublished (U.S. Court of Appeals, Fourth Circuit).

Cogswell, et al. v. CitiFinancial Mortgage Co.
Case No. 08-2153, Decided: Oct. 15, 2010 (U.S. Court of Appeals, Seventh Circuit)

USA v. Bakowski.
Case No. 8:09-CR-491-T-33TBM, Filed: 10/20/2010 (District Court of Florida, Tampa District).

State of Maine v. Erick S. Murphy Jr.
Case No. CR 09149, Filed: June 2, 2009 (Superior Court for Hancock County Maine).

Eric S. Murphy Jr. v. Maine.
Case No. CR131, Filing Date: Jan. 25, 2011, docket Feb. 15, 2011 (Superior Court for Hancock County Maine)

People of the State of California ex rel. Edmund G. Brown Jr. v. Federal Housing Finance Agency, et al.
CA No. C10-03084, Filing Date: Jul. 14, 2010 (U.S. District Court for the Northern District of California).

Info on Brown and Cogswell provided by Leagle Inc.

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