$133 Million Settlement for Mortgage Fraud Lawsuit

First appeared in Detroit Free Press

The U.S. government announced Friday that it had reached a $133-million settlement with Troy-based Flagstar Bank that resolves a civil fraud lawsuit accusing the bank of fraudulent mortgage lending practices.

The lawsuit, filed by the U.S. attorney for the Southern District of New York and the U.S. Department of Housing and Urban Development, alleged that Flagstar used unqualified employees to approve mortgage loans backed by HUD, approved mortgage loans that did not comply with HUD and Federal Housing Administration underwriting requirements, and made false certifications on mortgage loans.

The lawsuit "is another stark example of how certain lenders put profit ahead of responsibility by recklessly churning out mortgage loans without regard to the risk that those loans would default or the significant consequences for the individual homeowners who would inevitably default on their loans," Preet Bharara, U.S. attorney for the Southern District of New York, said in a statement Friday.

Flagstar's CEO and president Joseph Campanelli said in a statement that the bank "is one of the leading originators and servicers of FHA-insured loans, and we remain committed to continuing in that capacity. This agreement with the Department of Justice allows us to move forward and to continue to focus on core operations and on serving our customers."

This is the fourth lawsuit brought by Bharara's office against residential mortgage lenders. The government also has sued Deutsche Bank, Allied Home Mortgage and CitiMortgage, a subsidiary of Citibank. CitiMortgage reached a $158-million settlement with the government.

Under terms of the settlement, Flagstar agreed to pay $15 million within 30 business days and will pay an additional $118 million as soon as it meets certain financial benchmarks. An independent third party, paid for by Flagstar, will monitor the bank's compliance with HUD and FHA lending rules for at least one year.

Flagstar also agreed to implement a training program for employees involved in the originating and underwriting of FHA loans, and it agreed to terminate the senior managers who had been overseeing the bank's manual underwriting process.

Because of the settlement, Flagstar will revise its fourth-quarter 2011 and full-year 2011 earnings, which were announced Jan. 24. The bank said its net loss for the fourth quarter could increase by between $25.9 million and $34.3 million, but it still expects to achieve profitability this year.

Flagstar is one of the largest residential mortgage lenders in the country, originating $26.6 billion in mortgages in 2010. The bank is the largest publicly held savings bank in the Midwest, with $13.6 billion in total assets and 113 branches in Michigan. It is majority-owned by MatlinPatterson Global Advisers, a New York-based private equity firm.

The bank did not return requests for comment late Friday.

More Short Sales

First appeared in USA Today

Lenders are allowing more short sales by financially strapped homeowners and a few people are even getting cash to complete the sale. Such is the case with Durham Short Sales.

Short sales are when lenders allow borrowers to sell homes for less than their unpaid mortgages. They are an alternative to foreclosures.

Short sales have been increasing for months, but the financial incentives — which Realtors say are random and infrequent — are a newer wrinkle. Those who care about Brooklyn Home Insurance are paying attention.

Examples:

·         JPMorgan Chase went national with short-sale incentive offers last year, paying up to $35,000 in some cases.

·         Bank of America is testing incentives from $5,000 to $25,000 in Florida to see if they should be expanded to more states. The Florida program began last fall, spokesman Richard Simon says.

·         Wells Fargo's incentive offers range from less than $3,000 to $20,000, spokesman James Hines says.

Short sales, even with incentive payments to borrowers, can save lenders money compared with the expenses involved in completing foreclosures. This is true of Triangle Homes for Sale Foreclosures.

In states such as Florida where foreclosures go through the courts, 50% of loans in foreclosure are more than two years past due, says a January report by mortgage tracker LPS Applied Analytics.

"It's a lot cheaper to shell out $10,000 or $20,000 to someone than it is to go through a long foreclosure," says Jim Gillespie, chief executive of Coldwell Banker.

Banks are more willing to do short sales now than in the past, Gillespie says. Cash incentives appear to be "limited but increasing" in number, he adds.

"When a loan modification isn't possible, a short sale may be a better and faster solution" than foreclosure, says JPMorgan Chase spokesman Thomas Kelly.

The lenders won't say how often they extend such incentives. Those in Cary Short Sales are curious, though.

"If you have two similar sellers, one might get it and another may not," says Colleen Badagliacco of Altera Real Estate in San Jose. "It's very random."

Typically, short sale incentives are more common for loans in states where foreclosures take more time, Hines says.

In November, short sales accounted for more than 9% of single family home sales and were up 32% from the year before, according to CoreLogic.

Market researcher Dataquick also shows short sales increasing from January 2011 through last month throughout California and in Phoenix, Miami and Seattle.

The federal government-run foreclosure prevention program also offers short sale incentives, at least $3,000 for sellers, but far more short sales are being done outside the government program.

Through December, just 26,901 short sales had been completed through the Home Affordable Foreclosure Alternative (HAFA) program. A Raleigh Real Estate Lawyer is curious.

In contrast, BofA, the largest servicer of home loans, did 107,000 short sales last year. That was up from 92,000 in 2010, which was double the 2009 volume, it says.

"The trend is up," says Moody's Investors Service analyst William Fricke.

$26 Billion Mortgage Settlement Is Being Called Historic

First appeared in USA Today

Five major mortgage servicers agreed to a $26 billion settlement with state and federal officials in a deal that is being called historic, but which critics are likely to say doesn't go far enough.

The deal could grow to $30 billion if nine more servicers sign on, and it's expected to cover almost all 50 states, a White House official said Thursday.

The settlement would be the biggest involving a single industry since a 1998 multistate tobacco deal.

A monitor will be appointed to see that it is carried out.

The five servicers involved so far —Bank of America, JP Morgan Chase, Citigroup, Ally Financial and Wells Fargo— will provide $17 billion in mortgage relief to more than 1 million homeowners. Another $1 billion will go to the federal government; $3 billion will help the servicers refinance borrowers into lower-interest rate loans.

Hundreds of thousands of borrowers are also expected to receive restitution, averaging $1500 to $2000, if they lost homes to foreclosure from 2008 to the end of 2011.

The relief must be extended within three years or servicers would have to pay any remaining part of the settlement in cash. To encourage servicers to do more work sooner rather than later, given the ongoing foreclosure crisis, they'll get more credit for modifying and refinancing loans in the first year of the deal.

The settlement, which has been a year in the making, will create the largest effort by servicers so far to write down the amount homeowners owe on underwater mortgages, where the homeowners owe more than the house is now worth. Falling property values have put many homeowners under water. Home Insurance in New York City may be able to help.

The reductions in loan principal are expected to account for at least 60% of the $17 billion pot. By writing down principal, officials hope fewer people will eventually default on their loans.

Most of the writedowns are expected to occur on loans that the five servicers own themselves, and will not include any loans owned by mortgage giants Freddie Mac, Fannie Mae or the Federal Housing Administration.

The impact of the principal reduction is expected to go farther than the actual dollars. Servicers will get "credits" for writing down loans at varying stages of being under water. They'll get more credit for some writedowns than for others, officials said.

All told, the $26 billion deal could provide up to $40 billion in mortgage relief, one official estimated.

If so, California officials said in a statement that state would get $18 billion of that, including $12 billion in principal reductions and other relief for an estimated 250,000 homeowners.

"This is an historic amount of relief for California homeowners, but it is one piece of a broader focus. We will continue our crackdown on mortgage fraud and quickly move to pass legislation that will simplify, reform and upgrade our broken mortgage system," California Attorney General Kamala Harris said.

In most cases, to be eligible for principal write downs, borrowers would need to be delinquent on their mortgages. While the principal writedowns, when averaged, might run just $20,000 or so on a national basis, writedowns could be much larger in some cases, officials say.

The servicers will be expected to devise a plan on how to reach out to borrowers to carry out the mortgage relief.

The settlement is expected to include most states; New York and California were prominent last-minute holdouts. A Brooklyn Homeowners Insurance company waits to hear.

In exchange for the settlement, the servicers will get some relief from future legal claims.

But disgruntled borrowers could still sue individually or as part of a class action. The settlement also does not prevent future or ongoing lawsuits in the arena of securitization, in which loans were packaged and sold to investors. Nor would it prevent any criminal investigations.

The nationwide settlement stems from abuses that occurred after the housing bubble burst. Many companies that process foreclosures failed to verify documents. Some employees signed papers they hadn't read or used fake signatures to speed foreclosures — an action known as robo-signing.

Along with financial costs, the settlement is expected to create what supporters say are the strictest standards to date for how mortgage servicers should treat distressed home loan borrowers in the future.

Support for the settlement by so many states increases chances that it'll be viewed as a win for the state attorneys general.

It also arms the Obama administration with more ammunition for its claims that it's addressing the foreclosure crisis.

But the settlement falls far short of fixing all that went wrong in the U.S. mortgage industry, after risky loans were extended to millions who couldn't afford the loans. That helped lead to a collapse in U.S. home prices, which are down an average of 33% nationwide since 2006.

The settlement will not compensate the vast majority of U.S. homeowners who have kept making payments while their home values plunged.

Instead, much of the settlement will help homeowners who are on the brink of foreclosure — but have continued to make payments — with principal reductions.

If the principal reductions help prevent foreclosures, that will mean fewer distressed homes for sale, which could help overall home prices.

But U.S borrowers collectively owe $700 billion more on their homes than their homes are worth. The principal forgiveness is "not going to be enough to generate a significant and sustained housing market recovery," says Capital Economics economist Paul Diggle.

For weeks, attention has largely focused on how much the servicers would end up paying in the settlement, and what states would sign on.

But state and federal officials say new servicing standards, which affect how companies interact with distressed borrowers, are equally important.

"There's no doubt that they are an improvement," says Ira Rheingold, executive director of the National Association of Consumer Advocates.

The new standards are expected to restrict one practice that has long been criticized, dubbed "dual track." That's where servicers proceed with foreclosures even if someone is pursuing a loan modification. Not even the best Queens Homeowners Insurance can fix everything.

The agreement won't ban that completely, but it would prevent servicers from completing a foreclosure sale of a home if a modification is being considered.

Servicers will also be required to provide borrowers with a single point of contact, something other new standards also require. Most large servicers already have that or are implementing it, companies say.

In addition, the settlement monitor will periodically test that foreclosure affidavits are executed properly.

NY Attorney General Sues Banks Using an Electronic Mortgage Database

First appeared in Reuters

New York State Attorney General Eric Schneiderman on Friday sued three major U.S. banks, accusing them of fraud for using an electronic mortgage database that resulted in deceptive and illegal practices.

Schneiderman filed the lawsuit against Bank of America Corp (BAC.N), Wells Fargo & Co (WFC.N) and JPMorgan Chase & Co (JPM.N) in New York state court in Brooklyn.

The lawsuit is over the banks' use of MERS, the Mortgage Electronic Registration System the industry created in the mid-1990s to track the ownership and servicing of residential mortgage loans.

Schneiderman claims the system is plagued by inaccuracies. The lawsuit also names MERS and its parent as defendants.

"The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse," Schneiderman said.

Schneiderman's lawsuit claims that banks saved $2 billion in recording fees by using MERS.

The suit also said the use of MERS resulted in the filing of improper NY foreclosures and created "confusion and uncertainty" over property ownership interests.

Over 70 million mortgage loans, including millions of subprime loans, have been registered in the MERS system, rather than in local county clerks' offices, according to the lawsuit.

Schneiderman is seeking to stop the banks from filing New York foreclosure actions in MERS name, and executing false or defective mortgage assignments in state foreclosure proceedings. He is also seeking to obtain the profits the banks obtained through MERS, along with other damages.

JPMorgan spokesman Patrick Linehan declined to comment on the lawsuit. Wells Fargo spokesman Ancel Martinez said the company was reviewing the lawsuit. Bank of America spokesman Rick Simon declined comment.

Merscorp and its subsidiary MERS comply with the law and mortgage regulations, spokeswoman Janis Smith, a spokeswoman said in a statement.

"We refute the attorney general's claims and will defend the case vigorously in court," Smith said.

MERS was sued by Delaware in October and similarly accused of deceptive practices that led to unlawful shortcuts in dealing with the foreclosure crisis.

MORTGAGE SETTLEMENT NEARS

Schneiderman filed the suit in his capacity as New York attorney general, but he also serves as co-chair of a working group President Barack Obama formed last month to investigate misconduct in the pooling and sale of risky home loans.

Schneiderman is also a central figure in widely publicized negotiations to reach a federal-state settlement with the top U.S. banks over mortgage abuses.

A key question is whether holdouts, including Schneiderman and California Attorney General Kamala Harris will join the settlement.

Danny Kanner, a spokesman for Schneiderman, declined comment on what Friday's lawsuit may mean for the prospects of the settlement, which could be announced as soon as next week.

In exchange for up to $25 billion, the banks are expected to resolve state and federal lawsuits about servicing misconduct and faulty foreclosures. The states have until Monday to decide whether to sign on.

A draft settlement circulated to the states would have released the banks from liability for their use of MERS - claims at the heart of the new lawsuit.

The New York lawsuit suggests Schneiderman and other attorneys general opposed to the settlement may have been successful in working to narrow the broad releases of liability.

Last week Schneiderman told Reuters that the releases in the settlement had "become narrow enough" so that a "full investigation" by the new mortgage crisis unit could move forward.

However, Schneiderman said last week he was not yet ready to sign on to the settlement.

On Thursday, California AG Harris told Reuters that she is not focusing on the Monday deadline for states to sign up.

"I'm less concerned with the timeline than the details," Harris said on the sidelines of a Harvard Women's Law Association conference in Boston.

Harris said any settlement should address the priorities she has previously laid out, like enforcement.

She also said she was aware of Schneiderman's lawsuit against banks over MERS, but that MERS was less of a priority in the scope of California's mortgage problems than it was in other states.

"But we support that MERS work," she added.