Foreclosure Buzz

Update: Countrywide has also sued Triad Guaranty Insurance and alleged that Triad ”encouraged lenders to develop new and more risky mortgage products” before the worldwide financial crisis, and now wants to rescind coverage for many of Countrywide’s 60,000 outstanding mortgage loans, worth more than $9 billion.  See story here.

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In addition to bailouts, lenders are looking towards their insurance to cover some of their losses caused by their own misconduct.  (Using taxpayer bailout money for lender bonuses might seem infuriating to some, but on Wallstreet, companies that go after their insurance buddies in the skyscraper next door is just plain rude.  Remember that insurance companies have to invest their premiums somewhere, after deducting a small fee they take for themselves of course.)  But I digress.  Rather than sweep it under the rug and work this out on the golf course, insurance companies are balking at lender claims and running for cover — even using the courts themselves to preemptively strike at the throats of their own Wallstreet customers.

The last day of 2009, Republic Mortgage Insurance Company (RMIC) and others sued Countrywide, The Bank of New York Mellon Trust Co., BAC Home Loans Servicing LP and Bank of America in New York Superior Court. A copy of suit is here.  The insurance companies sold policies to cover lenders for the failures of borrowers to repay home mortgage loans (so called “flow insurance”). This is not mortgage insurance purchased by homeowners — these are policies purchased by lenders to cover themselves in case they made bad loans.  Shockingly, the insurance companies do not want to pay up now because, surprise, surprise, there are material misrepresentations in the loan documents.

In each instance, RMIC properly rescinded coverage, either based upon either a material misrepresentation by the borrower or a material misrepresentation or negligence by the insured, correspondent lender, mortgage broker, intermediary underwriting or processing the loan on behalf of the insured, escrow agent, closing agent, or any other agent or broker for the insured or other person which originated or processed the loan or acted with respect to the loan, or appraiser or other person providing a valuation of the property that is used in the underwriting, processing, or origination of the loan.

RMIC suit at 22, paragraph 83, here.

In response, Countrywide explains that RMIC knew it was making bad loans all along, and is moving the case to arbitration. Motion here. 

In another case, Countrywide and BAC Home Loans Servicing LP (which are both Bank of America entities) sued Mortgage Guaranty Insurance Corporation (MGIC) in California state court (here), which was removed to federal district court (here). MGIC is the nation’s leading provider of private mortgage insurance coverage with $212.2 billion primary insurance in force covering 1.36 million mortgages as of December 31, 2009, and serves over 3,300 lenders with locations across the country. MGIC press release here.  Although the posture of the MGIC case is different from the RMIC case (in terms of who sued first), the nature of the MGIC case is the same as the RMIC case — the insurance company is denying claims made by the lender worth hundreds of millions of dollars based upon misrepresentations.  See article here, and here.  In this case it is the insurance company who wants to take the case to arbitration.  See motion here.  

But Countrywide had more to say naturally about MGIC that was particularly interesting:

MGIC not only obtained detailed and comprehensive information from its dealings with Countrywide, it also obtained massive amounts of information from its relationships with other [purportedly 3,300] mortgage insurance lenders.  Through its partnering arrangements with other lenders, MGIC undoubtedly has vast stores of information and data regarding the mortgage lending industry, far more information than any individual lender might possess.  Among the material that MGIC has obtained over the years from these lenders is detailed information about each lender’s underwriting guidelines.  Accordingly, MGIC has been privy to underwriting guidelines from lenders and has seen the development of underwriting practices and procedures for years. 

Countrywide v. MGIC, Complaint at 8, here.

In each case, the insurance companies point to the malfeasance of the lenders and borrowers to justify the denials (they call a denial a “rescission”).  None of these allegations are new to anyone nowadays — what is new is the lenders’ claims that insurers knew about what the lenders were doing, and that the insurance companies tacitly approved it.  The information held by these insurers is undoubtedly vast — and should be explored by others as a check on the claims of lenders in disputes with borrowers for example.

Because they sense the end is near, another mortgage insurer, MBIA (once dominant in municipal bond insurance), split up so they will all still have jobs after the mortgage insurance claims drive them under (clearly they are deserving of their tag line – “Wisdom in Action”).  The New York Insurance Department approved the split (article here), but banks sued in New York state court, and hedge funds sued in federal court.  Both the state court (NYT article here), and the federal court refused to dismiss the case (order here).  This is just more evidence that the system works — the financial industry insurers make mistakes, and after they spend the premiums, they look to split off the bad bets and let those claims fail.  Quite a system.  Of course if the split is approved it will leave cities and counties able to obtain better returns for their bonds and leave the lenders who made the bad bets facing a limited funding to back them up.  It seems ridiculous to allow MBIA to split, but I do enjoy watching the industry turn on itself while helping cities and counties keep better returns on their bond projects.

Filed under: National Foreclosure News