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Servicers Navigate Courts

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Mortgage Daily

                                                 January 30, 2012

While foreclosures and loan modifications have been the top stories in mortgage servicer litigation, the firms still face legal actions on other fronts. Among the other issues that the sector is dealing with are flood insurance coverage, homeowners insurance claims and repurchases.

A federal class action was filed on Nov. 2 in Minnesota against U.S. Bank, N.A., and U.S. Bank Home Mortgage, according to an announcement from Nichols Kaster LLP. Lead plaintiff Matthew Lacroix claims that the Minneapolis-based institution billed his escrow account for forced-placed flood insurance that exceeded his loan balance despite that the policy didn’t provide coverage in excess of loan balances.

The National Flood Insurance Act does not require coverage in excess of the loan amount, the statement said. The allegedly improper charge caused Lacroix’s escrow account to be depleted — resulting in a higher monthly payment and a “significant hardship.” The lawsuit asserts claims for breach of contract, breach of fiduciary duty and unjust enrichment.

“This insurance was not only unnecessary — it was worthless,” Kai Richter, attorney for the plaintiff, said in the announcement.

Central Mortgage Co. entered an agreement in July 2005 to purchase around $1 billion in servicing rights from Morgan Stanley on an ongoing basis. All of the loans were presented as Alt-A quality mortgages that Morgan Stanley planned to sell to Fannie Mae, Freddie Mac and private investors.

Central Mortgage notified Morgan Stanley in early 2007 that the loans were not performing at the expected level. While Morgan Stanley had originally assured Central Mortgage about the due diligence performed on the loans, it allegedly acknowledged at that point a technical oversight and admitted that the due diligence was not performed at the promised level. Morgan Stanley agreed to reduce the service rights by 2 percent and otherwise “take care” of Central Mortgage. In addition, the investment banker agreed to repurchase servicing rights for loans that became 90 days delinquent during the first year after the sale.

As Fannie and Freddie began issuing repurchase demands to Central Mortgage, the servicer forwarded the demands to Morgan Stanley which then repurchased the loans or made make-whole payments. But after 47 repurchase demands, Morgan Stanley allegedly stopped standing behind its promise — leaving Central Mortgage on the hook for around 190 loans.

Central Mortgage filed a complaint against Morgan Stanley, but the Vice Chancellor dismissed all of its claims on Aug. 19, 2010. So Central Mortgage appealed the dismissal to the Supreme Court of Delaware, and the dismissal was overturned.

A mortgage on a New Orleans property was financed by Centex Home Equity Company LLC in June 2005. Two months later, the property was damaged by Hurricane Katrina, and an $84,000 check was issued by Fidelity National Property and Casualty Insurance Co. jointly to the borrower and HomEq Servicing Corp., which took over servicing when the loan was assigned to Greenwich Capital Financial Products in September 2005.

Centex Home Equity subsidiary Harwood Street Funding II LLC repurchased the loan from the trust.

The borrower deposited the check into his own account with Hibernia Bank, N.A., which was subsequently taken over by Capital One. Centex Home Equity, which was sold and renamed Nationstar Mortgage LLC, sued Capital One for conversion of a negotiable instrument claiming that HomEq did not consent to any endorsement of the check on its behalf. The trial court ruled for Nationstar.

But Capital One appealed the decision with the Court of Appeals of Texas, Fourteenth District, Houston, and the decision was overturned.

“Because the evidence is legally insufficient to show that Nationstar had an express or equitable assignment of the rights to the check, we reverse the judgment of the trial court and render that Nationstar take nothing,” the decision stated.

Bank of America, N.A., and BAC Home Loans Servicing LP entered a settlement with the Department of Housing and Urban Development in August 2011. The terms call for loss-mitigation assistance to more than 57,000 borrowers and to investigate the whereabouts of impacted borrowers that weren’t occupying the properties.

The settlement requires BofA to pay down all but 12 past-due FHA payments on loans where borrowers would qualify for an FHA-HAMP modification or a partial claim. If it winds up paying less than $10 million, then the difference will be remitted to HUD. The remaining borrowers will be paid $4,000 in transition expenses for short sales and $7,500 in transition expenses for completed deeds-in-lieu of foreclosure.

BofA didn’t admit to any wrongdoing.

The Federal Trade Commission last year announced that it was mailing 450,177 refund checks for nearly $108 million to borrowers who were allegedly overcharged by Countrywide Home Loans Inc. The payments were made as part of a 2010 settlement.

As part of a proposed $8.5 billion settlement with mortgage-backed securities investors, nine residential sub-servicers were recently named to take over servicing on securitized mortgages issued by Countrywide Financial Corp., the Wall Street Journal reported. The sub-servicers include Nationstar Mortgage, Select Portfolio Servicing, Greentree Servicing and Residential Credit Solutions.

Mortgage servicing employees are being courted by Americas Watchdog Corporate Whistle Blower Center with potential “major whistleblower awards.” Also being solicited are appraisal and compliance employees.

“It’s wrong, you have tried to go to senior management, and they have either told you to ignore it, or they have threatened you,” the statement said. “If you can prove massive fraud, or wrongdoing in a major U.S. bank’s, or a major loan servicing operation, your information could be worth millions to you, and we can help you.”

After USA Commercial Mortgage Co. filed for bankruptcy, Compass Partners LLC and Compass USA SPE LLC acquired all of USA’s assets including its rights under loan service agreements with the direct lenders of the loans. Silar Advisors LP, which financed Compass’ acquisition of the assets, subsequently foreclosed and conveyed all interest in the servicing agreements to Asset Resolution.

In November 2007, the district court entered a preliminary injunction that enjoined the lenders from taking action to terminate Compass as the servicer and enjoined the disbursement of disputed funds until the court issued an order. Asset Resolution was substituted for Compass in September 2008, and the lenders filed an interlocutory appeal of the modification to the injunction — which the U.S. Court of Appeals, Ninth Circuit, affirmed.

But the lenders were allowed to request an order of relief from the preliminary injunction if 51 percent of lenders associated with a particular loan were behind such a move. Based on the provision, the lenders moved to terminate Asset Resolution as the servicer on 29 loans, and the district court granted the request.

In January 2010, the district court vacated the injunction, and Asset Resolution appealed. But the decision was affirmed by the appeals court.

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