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Secondary Subprime Suit

Secondary Subprime SuitEMC vs. MortgageIT

December 15, 2006

WASHINGTON correspondent for

Two mortgage companies, one owned by an investment banker and another in the process of being acquired by an investment banker, are battling over $70 million in subprime mortgage buybacks.In a legal action being fought in federal court in Dallas, EMC Mortgage Corp. has pointed the finger at MortgageIT Inc. EMC says MortgageIT owes it $70 million in buybacks for about 587 subprime loans.

But MortgageIT has denied the allegations.

Irving, Tx.-based EMC says MortgageIT failed to live up to a 2003 agreement to repurchase residential first or second lien subprime mortgage loans that went into default or that were paid off early. EMC says in legal documents that it filed the lawsuit only after MortgageIT failed to meet its out-of-court demands for satisfaction of the matter.

New York-based MortgageIT has refuted EMC’s claims in court documents. MortgageIT’s attorney declined to comment, explaining that it is MortgageIT’s policy not to comment on matters in litigation.

In a 124-page complaint, Bear Stearns Co. subsidiary EMC is suing for breach of contract, breach of warranty and has asked the court to compel MortgageIT to specifically perform in accord with the written agreement between the two lenders. EMC is still fine-tuning the number of loans it claims are in dispute as attorneys for the company are expected to file a supplement to its complaint in court this month.

Specifically, EMC alleges that MortgageIT violated the express terms of the agreement they made in 2003 because it did not buyback certain that were “clearly” in default because the borrower failed to make a scheduled payment. EMC claimed MortgageIT agreed to repurchase any loan within five business days of notification in the event any of the first three scheduled monthly payments were not made in the month due.

EMC alleged MortgageIT failed to make payments to EMC in cases where the borrower made a principal prepayment and that MortgageIT failed to indemnify EMC for MortgageIT’s alleged failure to comply with some of the servicing provisions of the agreement. EMC claimed MortgageIT agreed to pay EMC if a mortgagor made a principal prepayment within three months of the closing date of the loan. EMC said in court documents that MortgageIT received principal prepayments but did not send the money on to EMC.

EMC is also asking for reimbursement of its attorneys’ fees.

In addition to monetary damages, EMC said in court documents that it has been harmed by MortgageIT’s alleged breach of the agreement because it is has to maintain the loans and, as a result, remains exposed to any claims against or losses that might be suffered by the owner of the loans.

EMC also said that because the loans are in default, it is unable to include them in securitizations or other similar packages, one of the specific purposes for which it purchased the loans.

The Texas-based lender said in the lawsuit that it notified MortgageIT several times of the alleged breaches and that it provided MortgageIT with several opportunities to resolve the alleged defaults, to reimburse it under the agreement or to buyback the loans.

The case was filed Feb. 16, 2006 in the United States District Court Northern District of Texas, Dallas Division.

EMC was reportedly among 11 lenders that unsuccessfully sought more than $20 million in loan repurchases from a Bellville, N.J., lender, D&M Financial Corp. which declared bankruptcy.

MortgageIT has announced it expects to be acquired by Deutsche Bank next month.

Lisa D. Burden is a legal analyst for and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at:

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