Mortgage Litigation Update

TASA ID: 2590

November 2011 

Mortgage litigation in the U.S. has apparently slowed down significantly this year. The reason, I believe, lies in three major issues and initiatives.

1. The Bank of America/Countrywide settlement with investors over negligent origination and servicing practices, which has now been challenged by other Countrywide and Bank of America mortgage and mortgage-backed securities investors not included in the settlement negotiations. Investors have been demanding repurchase of these loans and securities. This settlement also has ramifications for all lenders attempting to value impaired mortgage and servicing assets on their balance sheets and estimate litigation costs.
2. The settlement negotiations which are ongoing between major mortgage servicers, such as Bank of America, Wells Fargo, JP Morgan Chase, Ally Financial, and Citigroup, with most of the individual state Attorneys General in the U.S as a group, over foreclosure fraud. This settlement discussion includes a limitation of liability for the servicers, which will impact claims for damages. Some of the states are balking at that whole discussion.
3. The lawsuits of various municipalities over the actions of the Mortgage Electronic Registry (MERS) to defraud those municipalities from recording fees for the transfer of mortgages. This issue has also entered the discussion with the group in the foreclosure discussion above. It is unclear whether any agreement on this issue will be reached. The foreclosure issue, itself, is difficult enough. MERS has been a factor in the foreclosure fraud litigation.

The litigation volume and issues involved had been multiplying rapidly from 2008 through 2010. The above issues have global ramifications for all related litigation, so the process has slowed considerably. There are still significant damage claims and value losses to be mitigated. Issues two and three above have slowed the foreclosure process, in my estimation. Banks and investors with mortgage and servicing assets that are subject to litigation over poor lending practices are still not giving a realistic value to those assets, in my opinion.

There are a significant number of lawsuits that are pending in all three of the categories above. Some are in state courts; some are in federal courts. There are many other lawsuits where the above are not primary, but secondary or related issues, in my opinion. Some of the litigation has been slowly progressing; some has been halted. Some litigation faces statute of limitation issues in various jurisdictions.

These global litigation discussions are complex, and it is extremely difficult to bring all of the parties together in such a settlement. Those involved believe that such a settlement would be cost-effective for all. I believe there will eventually be resolution on all fronts, but maybe not a settlement. Lack of an agreement will likely stimulate all the backlogged litigation to proceed through the legal system if an acceptable large-scale agreement becomes impossible.

Recommended Reading List

1. "Lawsuits Against Mortgage Securities Issuers: Damages Issues Ahead?" The D&O Diary, January 27, 2009.
2. "Mortgage Bondholders Gain Key Ally in Putback Fight." Reuters, March 15, 2011.
3. "Banks Face Fraud, Municipal Lawsuits after Foreclosure Agreement," David McLaughlin and Margaret Cronin Fisk, bloomberg.com, October 11, 2011.
4. "Update 2 - US states Near Foreclosure Deal with Banks," Reuters, October 18, 2011.
5. "Price of Foreclosure Settlement Climbs Higher", WSJ.com, Ruth Simon, Nick Timiraos, Dan Fitzpatrick, November 1, 2011.

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