Surprise! You Don’t Have To Pay As Much As You Thought On That Mortgage

by:  Peter J. Gallagher

Last week, Bank of America agreed to a multi-billion dollar settlement with upset investors who had purchased securities comprised of subprime mortgages originated by Countrywide Financial (which Bank of America acquired in 2008) and serviced by Bank of America ("Bank Of America Settles Claims Stemming From Mortgage Crisis").  Among other things, the investors claim that that Countrywide "created securities from mortgages originated with little, if any, proof of assets or income," and that Bank of America then "failed to heed pleas for help from homeowners teetering on the brink of foreclosure."  While the settlement still needs to be approved by a judge, and has already run into some opposition ("Investors Challenge Bank Of America Settlement" and "Bank Of America's Proposed Mortgage Debt Settlement Criticized"), it was generally seen as the first major concession by a bank in connection with its role in the mortgage meltdown

On the heels of this settlement comes news that Bank of America (along with JPMorgan and a few other lenders) is also taking a more proactive approach with homeowners who are not even in default.  As the New York Times reports in its article, "Big Banks Easing Terms On Loans Deemed As Risks," the banks are "quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk."  The article tells the story of Rula Diosmas, a Florida (of course) woman who had $150,000 shaved off of the mortgage of her Miami condominium by JPMorgan even though she did not request a modification and was not in default.  The bank explained its reasoning as follows:

Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.

. . .

Option ARM loans like Ms. Giosmas’s gave borrowers the option of skipping the principal payment and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body of the loan.

. . .

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm [a spokesman for Bank of America] said.

The banks' efforts have not come without some critism, however, including the claim that the banks are behaving in "contradictory and often maddening ways" — showing concern for those who might get in trouble while at the same time being punished by regulators for doing a poor job modifying mortgages that are already in default.

JPMorgan Settles With The SEC

by:  Peter J. Gallagher

The SEC announced yesterday that JPMorgan Securities LLC agreed to pay $153.6 million to settle SEC charges that the company "misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet."  Pursuant to the settlement, "harmed investors will receive all of their money back.”  Just like it did with Goldman Sachs and its now infamous ABACUS 2007-1 deal, the SEC alleged that JPMorgan allowed a hedge fund manager to pick the assets that went into its (equally obscurely named) Squared CDO 2007-1 deal without disclosing that the hedge fund chose the worst assets it could find because it planned to short the offering.  You know how this story ended – investors lost their shirts, the hedge fund got rich(er).     

The settlement has been widely reported in the media, with some interesting takes on the meaning of the settlement to the overall prosecution (by the SEC, private investors, attorneys general, and the DOJ) of the banks for their role in the crisis.  Among the more interesting pieces:

"Is JPMorgan's Settlement The End Of Subprime Claims?" (Reuters) (arguing that that the settlement was a win for JPMorgan but that it does not mark the end of the pain for the bank or its competitors who all face dozens of pending investor lawsuits)

"JPMorgan Settlement Suggests More Pain Ahead For Wall Street" (WSJ – Law Blog) (predicting increased pressure by the SEC on other banks for similar settlements and including the most bizarre and disturbing quote from an email that the JPMorgan employee in charge of selling the Squared CDO 2007-1 deal wrote to his sales team: “We are soooo pregnant with this deal, we need a wheel-barrow to move around . . . Let’s schedule the Cesarean please!”)

"JPMorgan Settlement With SEC Recalls Case Against Goldman Sachs" (providing more detailed reporting on the story and less commentary than the others)

Paperwork Problems Stall Foreclosures, Serve As Wake Up Call To Lenders

The NY Times has run a series of articles recently about the decisions by two of the nation's largest home loan providers to halt all foreclosure proceedings because of problems with the paperwork used to prosecute these actions.  The paper notes that both GMAC and JPMorgan have halted all, or nearly all, pending foreclosure proceedings.  The problem centers around so-called robo-signers – employees who signed thousands of certifications per month in support of foreclosure complaints, without ever having reviewed the underlying loan or title documents about which they were certifying.  Another article Foreclosures Slow as Document Flaws Emerge highlights the collateral impact these revelations have had on the industry at large.  Among other things, the Times notes that homeowners will be more likely to challenge foreclosures in court, which has led at least one title insurer to refuse to issue policies in connection with GMAC foreclosures.  Although GMAC and JPMorgan are the only entities that have taken the drastic step of halting all foreclosure proceedings thus far, all lenders can expect increased push back from both debtors and courts in light of these revelations.   As a result, lenders should make sure that their paperwork is in order before filing a foreclosure complaint, and be prepared to defend their documents in court. 

In another article by The Washington Post Connecticut halts all foreclosures for all banks notes that Connecticut has ordered a 60-day moratorium on all foreclosures for all banks, and California has ordered a moratorium on all foreclosures initiated by GMAC and JPMorgan in light of the issues discussed above.  Other states may follow California's and Connecticut's lead, particularly in states where such actions might allow politicians to curry favor with the electorate in advance of the upcoming elections.