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Settlement is Another Blow to Nonconforming Lending in Mass.

A settlement in excess of $50 million has been announced by the Commonwealth of Massachusetts. At issue is the securitization of subprime mortgages. The settlement is just one of several such recent actions in the state tied to non-conforming lending and gives non-agency investors another reason to avoid lending there.

The state’s attorney general, Martha Coakley, announced Monday a $52 million settlement with RBS Financial Products Inc. Payment will be made under an “assurance of discontinuance” filed Monday in Suffolk Superior Court.

Coakley accuses the company, which previously operated as Greenwich Capital Financial Products Inc., of financing, purchasing and securitizing residential loans that were presumptively unfair under Massachusetts’ Consumer Protection Act.

Principal reduction of more than $40 million will be provided on 700 mortgages that were securitized in 2006 and 2007. The loans had a combination of risk features such as adjustable-rate mortgages with teaser-rates that had an introductory period of less than three years, debt-to-income ratios in excess of 50 percent and loan-to-value ratios greater than 97 percent. The risk features also included substantial pre-payment penalties or pre-payment penalties that extended beyond the teaser period.

Nearly $9 million will be paid to the state, while nearly $3 million will be used to compensate “sub-entities” of the state such as the municipalities most impacted by foreclosures on loans that were securitized by the Royal Bank of Scotland subsidiary.

The residential mortgage-backed securities issued by RBS were originated by Fremont, First Franklin, Countrywide, IndyMac and WMC Mortgage Corp.

Coakley boasted that her office has collected more than $600 million from lenders and investment banking firms.

“The securitization of subprime loans by investment banks is a major cause of the economic crisis,” the news release stated. “Investment banks profited handsomely from those securitizations at the expense of homeowners.”

In 2008, the state caused more than a dozen wholesale lenders to curtail or tighten lending with Coakley’s issuance of a regulation that restricted mortgage broker originations and limited fees and yield-spread premiums.

The state’s crackdown on nonconforming lending and securitizations is ironic given that Massachusetts Gov. Deval Patrick, who was inaugurated in January 2007, was a former director for former subprime lending giant Ameriquest Mortgage Co.

Among investment banks and lenders to pay for alleged lending abuses or violations in the state are:

  • H&R Block Mortgage Co., which in August of this year settled for $125 million allegations of unfair and discriminatory lending practices by former subprime lending subsidiary Option One Mortgage Corp.;

  • Morgan Stanley, which agreed to a $102 million settlement in June 2010 for its role in securitizing subprime mortgages that it “should have known were destined to fail;”

  • Countrywide Financial Corp., which agreed to a settlement in March 2010 that included $3 billion in loan modifications over alleged predatory lending practices;

  • CitiFinancial Inc., which Gov. Patrick announced in March 2010 had agreed to a $1.3 million settlement with 35 states over failing to report 91,127 residential mortgage loans as required by the Home Mortgage Disclosure Act;

  • American Home Mortgage Servicing Inc., which agreed in November 2009 to significantly modify or make payments of between $3,000 and $7,500 on 8,200 Massachusetts mortgages originated by Option One;

  • Fremont Investment & Loan and Fremont General Corp., which in June 2009 agreed to a $10 million settlement over alleged “presumptively unfair” mortgages made by the defunct company;

  • Taylor, Bean & Whitaker Mortgage Corp., which agreed to a $9 million settlement in June 2009 with 13 states including Massachusetts over alleged mortgage fraud on nontraditional loans;

  • Goldman Sachs & Co., which agreed to a $60 million settlement in May 2009 for its role in securitizing and securitizing “unfair” subprime mortgages;

  • WMD Capital Markets LLC, which agreed to a settlement in August 2008 over $65 million in loans it acquired from Fremont Investment & Loan; and

  • First Alliance Mortgage Co., which in March 2002 settled with the Federal Trade Commission and six states, including Massachusetts, for $74 million allegations of misleading borrowers about origination fees, interest rates and ARM terms.

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