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Servicing

ResCap sues 12 lenders, alleging bad loans bankrupted company

Says loans were “rife with fraud and compliance problems”

Gavel on dollars lawsuit

It appears that Residential Capital has decided not take its bankruptcy lying down. The company, which was once one of the largest mortgage servicers in the country, has filed lawsuits against 12 lenders that originated “poor quality” loans that ResCap purchased and securitized.

On Tuesday, the company filed lawsuits against the following in U.S. Bankruptcy Court in New York:

  • Bank of America
  • Summit Financial
  • Synovus Mortgage Corp.
  • Primary Capital Advisors
  • Cadence Bank 
  • Mortgage Investors Group
  • Honor Bank 
  • First Mariner Bank 
  • CMG Mortgage 
  • Citizens First Wholesale Mortgage 
  • RBC Mortgage Company
  • PHH Mortgage Corp

In each of the twelve lawsuits, ResCap alleges that the lenders are “legally and contractually responsible for the liabilities and losses caused by the poor quality of the mortgage loans in question.”

In the dozen nearly identical lawsuits, ResCap says that its business model was built on acquiring and securitizing residential mortgage loans from “correspondent lenders.” ResCap would then “distribute those loans by either pooling them together with other similar mortgage loans to sell into residential mortgage-backed securities or selling them to whole loan purchasers.”

ResCap says that the quality of the loans was critical to the company’s success and it required its correspondent lenders to abide by “stringent loan-level contractual representations and warranties designed to protect (the company) from the risks of borrower fraud, appraisal fraud, failure to comply with state and federal law, and other credit and compliance factors that could negatively impact the performance and value of the loans it purchased.”

Eventually, ResCap was sued by “numerous counterparties and investors in its RMBSs, based on allegations that the loans contained numerous defects and were rife with fraud and compliance problems.”

The company is now suing the lenders because it says the lenders did not honor the contractual representations and warranties and misrepresented the quality of the loans. ResCap is claiming breach of contract and indemnification.

In total, ResCap says that it purchased nearly 14,500 loans from the 12 lenders with an original principal balance of $1.5 billion.

ResCap claims that it was the lenders’ responsibility to collect information from the borrower, verify its accuracy and underwrite the loan. It claims that many of the loans it purchased included various defects, such as: income misrepresentation, employment misrepresentation, owner occupancy misrepresentations, undisclosed debt, and missing or inaccurate documents.

Each lawsuit details specific examples of what the company calls “significant and material defects.” One example from the lawsuit against Primary Capital says, “The stated income on the application was $95,000 in 2006, however, actual income in 2006 was only $828, as verified by the employer listed on the application.”

Another example of a loan defect from the lawsuit against Synovous: “The borrower on this loan misrepresented his/her income. The borrower's stated income was $12,000, whereas his/her actual average monthly income was $3,762. When actual income was used, the resulting debt-to-income ratio was 147%.”

In each lawsuit, ResCap seeks “contractual repurchase compensation and/or damages in excess of $75,000 and in an amount to be proven at trial, and an award of attorneys’ fees, interest, and costs” for each count of the lawsuit, one for breach of contract and one for indemnification.

Click here to read any or all of the 500-plus page lawsuits. 

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