Legacy Landscape and Proven Strategies in Defending...

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Legacy Landscape and Proven Strategies in Defending, Negotiating, and Litigating Mortgage

Repurchase and Indemnification Claims

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Presented by:

James W. Brody, Esq., Managing MemberAmerican Mortgage Law Group, P.C.

75 Rowland Way, Ste. 350, Novato, CA 94945Telephone: (415) 878-0030 x151 Email: [email protected]

[email protected]

Glen Corso, Executive DirectorCommunity Mortgage Lenders of America, Inc.

Telephone: 202-827-9989 Email: [email protected]

Important Notice(s): The American Mortgage Law Group, P.C. ("AMLG") makes available the information (the "Information") in this presentation for general informational purposes only. The Information is not intended to constitute, and does not constitute, legal advice. The Information is not intended to constitute, and does not constitute, a solicitation for the formation of an attorney-client relationship. No attorney-client relationship is created through your use of the or your receipt of the Information contained within the Presentation. AMLG accepts clients only in accordance with certain formal procedures, and renders legal advice only after the completion of those procedures, and/or completion and execution of an appropriate retainer agreement.

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Brief Introduction to American Mortgage Law Group, P.C.

• AMLG is a nationally recognized mortgage banking law firm, with offices in greater San Francisco and greater Boston.

• We represent a diverse clientele from all around the country (e.g., mortgage lenders, warehouse banks, investors, servicers, Wall Street banking firms, insurers/insured, etc.)

• We focus on:– Repurchase and/or Make-Whole Litigation Defense (Defended Against Repurchase Lawsuits Filed by CitiMortgage, LBHI, GMAC,

RFC, Franklin American, Wells Fargo, US Bank, Flagstar, FDIC, Etc.);– Repurchase and/or Make-Whole Mitigation Management (Forensic Audits, Rebuttals, Settlements, Etc.);– Defending and Prosecuting Contract/Commercial Litigation Disputes;– Investigative and Asset Search Services;– Third-Party Fraud Analysis and Resolution/Recovery (e.g., Prosecuted Cases Against Appraisers, Brokers, Real Estate Agents,

Borrowers, E&O Carriers, Settlement Agents, Title Companies, MI Companies, Etc.);– Title Clearance and Title Claims;– State and Federal Regulatory Compliance Issues (e.g., CFPB Audit Readiness, LO Comp, Etc.); – Public Speaking at Conferences (National MBA, Misc. State MBAs, District Attorneys, Etc.)

• Much, Much More!


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Brief Introduction toCommunity Mortgage Lenders of America

• The Community Mortgage Lenders of America (CMLA) is the voice for mid-sized and small, community-based lenders in Washington, DC.

• CMLA advocates for community-based lenders in DC with Federal regulators and Congressional lawmakers to ensure that the business concerns of our members are factored in as policy develops.

• CMLA members can participate in CMLA’s annual Washington DC Fly-In where members meet with their member of Congress, Senators and federal regulators to discuss issues of importance to residential mortgage lenders.

• CMLA members participate in task forces that determine CMLA policy on mortgage issues and draft regulatory comment letters.

• CMLA members also enjoy concise information on DC developments that impact their businesses and CMLA action plans to achieve favorable solutions for community-based lenders.

• Please contact CMLA’s Executive Director, Glen Corso, with questions about membership. Phone 202-827-9989 or [email protected]


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Mortgage Repurchase and Make-Whole Defense Introduction

• In the aftermath of the mortgage crisis, repurchase and indemnification demands have plagued correspondent lenders and originators for years.

• The various strategies to defend these repurchase claims are constantly changing and evolving in light of new regulations/guidelines and relevant court decisions.

• Bulk GSE/investor settlements, together with numerous developments in litigation, have fueled an uncertain repurchase/make-whole environment and a general increase in demands.

• Updated regulatory developments, including the Fannie Mae and Freddie Mac’s representations and warranties framework.


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OverviewI. Part 1: Introduction On Current Developments and the Mortgage Repurchase Landscape

II. Part II: The Effect of Industry Settlement Agreements• Overview of Major Settlement Agreements Between Secondary Market Investors and Agencies.

III. Part III: Current Litigation Landscape• Several Issues Currently Being Litigated in Courts Nationwide.• Current Litigation Landscape with Major Institutional Investors.• Latest Repurchase Litigation Defense and Resolution Strategies.• Settlement Strategies to Obtain Mutually Acceptable Resolutions.

IV. Part IV: FHFA’s Representation and Warranties Framework• Discussion of FHFA’s Updates to the Representation and Warranties Framework.

V. Part V: Concluding Thoughts• Final Thoughts and Tips on Repurchase Defense.

These issues will be discussed – and your questions answered – by James Brody.


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Part I:Introduction On Current Developments

and the Mortgage Repurchase Landscape

Large Global Investor/GSE Settlements and recent case law are driving increased litigation and an uncertain repurchase landscape. However, the confluence of the revised FHFA reps and warranties framework and MI master policy requirements may help brokers and lenders going forward.


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The Uncertain Repurchase Landscape

• Pressure from FHFA for large settlements with investors, and also large settlements with the US DOJ, is resulting in pushback fromthese settlements directly onto lenders, oftentimes many years after loan origination and even after there is no loan left to repurchase.

• The resolution of many legal issues underlying repurchase litigation remains unsettled and inconsistent across jurisdictions.

• Many key litigation issues, such as the statute of limitations, are being fought out in both the lower courts and appellate courts

• FHFA’s New Reps and Warranties Framework provides a sunset for a small number of claims, but leaves uncertainty as to most.


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The Increasing Importance of Reserves

• Given the current uncertainty, lenders should ensure they have sufficient reserves to cover likely exposure.

• Considerations in determining appropriate reserve levels:• Comprehensive risk assessment;• Look closely at problem loans;• Determine average repurchase losses historically; and• Err on the conservative side to mitigate the risk of large unexpected

losses.

• Private market insurance is an alternative.


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Part II:The Effect of Industry Settlement

Agreements

Big bank aggregators have settled up with GSEs, and in some cases, with the U.S. Department of Justice. These multi-billion dollar settlements have caused a domino effect, resulting in ramped up efforts to shake down correspondent lenders in effort to recuperate losses.


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Investor Settlements with the Agencies

• Many investors have entered into settlements with Fannie Mae andFreddie Mac to resolve claims related to loans sold during the mortgage meltdown.

• These settlements are important because if the investors paid mere pennies on the dollar to settle their claims with the agencies, then the associated lenders should enjoy the same discount in relatedrepurchase/make-whole requests.

• Investors should not be requesting to be “made-whole” for more than their actual damages on any loan.


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The 2010 and 2013 Bank of America Settlements with Fannie Mae and Freddie Mac

• As a part of multiple settlements in 2010 and 2013, Bank of America has paid Fannie Mae and Freddie Mac roughly $14 billion to resolve current and future repurchase claims on loans sold to Countrywide and Bank of America, with note dates between January 1, 2000, and December 31, 2008.

• Pursuant to the 2013 settlement agreement, Bank of America will:– Make a cash payment of $3.55 billion; and– Repurchase approximately 30,000 loans from Fannie Mae with an unpaid

principal balance and accrued interest for a total of $6.75 billion as of November 30, 2012.

– See Fannie Mae’s Form 8-K:http://www.fanniemae.com/resources/file/ir/pdf/form8k-010713.pdf.


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The 2010 and 2013 Bank of America Settlements with Fannie Mae and Freddie Mac (cont.)

• The settlement agreement also provides that:– Bank of America remains responsible to repurchase additional loans if the

grounds for repurchase are based on certain excluded defects (ex. third-party indemnification); and

– Fannie Mae will retain ownership of all of the loans covered by the cash settlement.

• See http://www.fanniemae.com/resources/file/ir/pdf/form8k-010713.pdf

• The agreement is driving a recent increase in BOA repurchase demands.


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Bank of America’s Ambiguous Responses to Inquiries Regarding Agency Settlements

• BOA’s statements are inconsistent with regard to the effect of its settlements with the agencies on its claimed damages.

• BOA claims that the discount received in its settlement with the agencies has been allocated on some undetermined percentage of liability based upon the total unpaid principal balance of loans that were 120 days or more delinquent.

• BOA’s alleged methodology is flawed in many ways: – (1) BOA first claims that it has allocated some unspecified discount to the lender, then later claims that the

lender was assigned “full responsibility.” Accordingly, these so-called “discounts” are not actually reflected in BOA’s claimed damages;

– (2) Basing the alleged discount on the unpaid principal balance of each loan is flawed as many properties were liquidated, thus making the unpaid principal balance an inaccurate calculation of actual damages; and

– (3) The pro-rata allocation based upon delinquency status fails to consider the performing, non-delinquent loans that were also included in the settlement - which would effectively lower the pro-rata share on each loan. Accordingly, BOA’s current methodology results in an inflated liability percentage – resulting in damages that are in excess of BOA’s actual damages per loan, following its settlements with the agencies.


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2014 Settlement Between the U.S. Department of Justice and Bank of America

• In August 2014, Bank of America reached a record-breaking $16.65 billion settlement with the Department of Justice (“DOJ”). This Settlement represents the largest civil settlement with a single entity in American history.

• The settlement resolved several of the DOJ’s ongoing civil investigations related to the packaging, marketing, sale, arrangement, structuring, and issuance of RMBS, collateralized debt obligations, and the bank’s practices concerning the underwriting and origination of mortgage loans.

• The “statement of facts” from the settlement included a number of striking admissions.

• Bank of America admitted to selling billions of dollars’ worth of RMBS without disclosing key facts about the quality of the loans backing them, which allegedly cost investors billions of dollars in losses.


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Morgan Stanley’s Settlement with FHFA

• In February 2014, Morgan Stanley agreed to pay $1.25 billion to the FHFA to resolve claims it sold defective mortgage securities to FNMA and FHLMC.

• The lawsuit covers mortgage-backed securities issued from September 12, 2005, to September 27, 2007.

• The case is Federal Housing Finance Agency v. Morgan Stanley, 11-cv-06739, U.S. District Court, Southern District of New York (Manhattan).


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2014 Lehman Brothers Holding, Inc. Settlement with Fannie Mae and Freddie Mac

In early 2014, LBHI settled disputes with Fannie Mae (for $2.15 billion) and Freddie Mac (for $767 million) concerning over 3,000 lenders and more than 11,000 “indemnification claims.” Under the settlements, Fannie and Freddie are to assist LBHI by providing sufficient loan-level information to allow LBHI to push back its losses onto the allegedly responsible lenders.

On May 29, 2014, LBHI filed a motion with the US Bankruptcy Court seeking an Order for mandatory mediation of the 11,000 outstanding claims, bringing the 3,000 lenders to in-person mediation in New York. As to most lenders, the Court entered the requested order on June 24, 2014. Several AMLG clients and other parties objected; as such, the Order is not yet final to them.

LBHI has sent out informal demand letters, attaching a copy of the Bankruptcy Court’s order as part of their demand.

Many lenders have already gone through the mediation process in New York. Those that have had no success in mediation await LBHI’s adversary complaint.

Finally, LBHI is already starting to file a few adversary complaints in the Bankruptcy Court.


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The 2013 CitiMortgage Settlement with the Agencies, and 2014 Settlement with the DOJ

• On July 1, 2013, CMI agreed to pay Fannie Mae $968 million to resolve potential future repurchase claims for breaches of representations and warranties on 3.7 million residential first mortgage loans sold to Fannie Mae that were originated between 2000 and 2012.

• On September 25, 2013, CMI announced that it agreed to pay Freddie Mac $395 million to resolve potential future repurchase claims for breaches of representations and warranties on mortgage loans sold to Freddie Mac with note dates between 2000 and 2012.

• On July 13, 2014, CMI reached a $7 billion settlement to resolve a US government investigation into mortgage-backed securities. The $7 billion settlement includes $4 billion in cash to the U.S. Department of Justice, $2.5 billion in consumer relief, more than $200 million to the Federal Deposit Insurance Corporation, and a little under $500 million to settle probes by five states.

• This settlement has resulted in an increase in repurchase and indemnification demands from CMI as it attempts to recoup its losses, as well as an increase in litigation after a significant 2-3 year lull.


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Wells Fargo Settlement with Freddie Mac

• On September 27, 2013, Wells Fargo announced that it has entered an agreement with Freddie Mac to resolve potential future repurchase claims for breaches of representations and warranties on residential mortgage loans sold to Freddie Mac prior to 2009.

• As part of the settlement agreement, Wells Fargo agreed to pay Freddie Mac $869 million to resolve the claims –which was adjusted to $780 million cash after adjusting for credits related to prior loan repurchases.


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Chase Settlement with FHFA

• On October 25, 2013, Chase announced that it reached a settlement with the FHFA for $4 billion to resolve claims related to residential mortgage-backed securities sold to Fannie Mae and Freddie Mac by JPMorgan Chase & Co., Bear Stearns & Co., Inc., and Washington Mutual between 2005 and 2007.– Under this agreement, Chase will pay approximately $2.74 billion to

Freddie Mac and $1.26 billion to Fannie Mae.

• In separate settlements, Chase also resolved claims related to the breach of representations and warranties regarding individual mortgage loans sold to Fannie Mae and Freddie Mac.– Under these agreements, Chase agreed to pay $670 million to Fannie

Mae and $480 million to Freddie Mac.


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Correspondent Global Settlement Strategies

• After settling with the Agencies, and some with the DOJ, big bank aggregators now push harder to recuperate their losses.

• How should you change your settlement strategy in light of the various settlements between the agencies and major investors?

– As with any negotiation, preparation is key:• Determine whether or not the loan was included in an agency settlement. • Demand that the investor provide a detailed analysis as to how any payments

made with respect to the Fannie Mae or Freddie Mac settlement were allocated to the subject loan, or show proof of the direct repurchase/make-whole if it was not settled in a bulk settlement.

• Request that the discount that the investor enjoyed with respect to the Fannie Mae or Freddie Mac settlement be applied to the claimed damages.


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Impact of the Global Settlements and How this Affects Repurchase and Indemnification Litigation and Mitigation Strategies – Projected Losses v. Pro

Rata Damage Calculations• Damages are difficult for investors to verify at an individual loan-level.

• Some investors distinguish between downstream loans sold to GSEs and “private-label loans.”Private-label loans are loans that the investors do not sell directly to GSEs. As a result, several investors have been unwilling to include such loans as part of global settlement discussions. However, some investors have been willing to release private label loans by entering into true global agreements (i.e. BOA), and others that are willing to enter into a contingent settlement for some private label loans (i.e. Chase).

• Unlike previous settlements, where claimed damages were based on projected losses that were verifiable, some investors are now basing their claimed damages on a pro rata method of calculation.

– This pro rata method of calculation works in the following manner: an investor evaluates how many loans were included as part of a global settlement with the Agencies; then the investor takes into account how many of those loans were with a particular lender; the investor then assigns a percentage of the overall global settlement figure to those groups of loan; and finally allocates damages to individual loans.


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Part III:

The Current Litigation Landscape

Investors’ approaches to litigation over repurchase claims are varied. Some are actively litigious, while others simply look for low-hanging fruit. This section will discuss current repurchase litigation trends and settlement strategies.


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Repurchase and Indemnification Litigation Overview

• Frequently Raised Legal Arguments Involving Repurchase and Indemnification Demand Litigation

• Statute of Limitation Arguments Overview• Statute of Limitation Arguments Involving New York law

• The impact of the Ace Securities Case, and the recent appellate decision• The significance of choice of law provisions and the borrowing statute

• Statute of Limitation Arguments Involving Colorado Law or Colorado Courts• Statute of Limitation Arguments Involving California

• Arguments and legal authority cited by investors• Arguments and legal authority cited by originators/lenders

• Statute of Limitation Arguments Involving Missouri• Special Statute of Limitations provision for the FDIC as Receiver

• Causation• Investors must show a causal link between the claimed breach and their damages

• Unilateral Attorneys’ Fees Issues


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Statute of Limitations for Investor-SpecificLoan Purchase Agreements

• Lehman Brothers Holdings, Inc. – there are three potential SOL periods involved: • 6 years (N.Y. C.P.L.R. §213 (McKinney) (Lehman LPA’s governing law is New York).• 3 years (N.Y. C.PL.R. §213; 10 Del Code section 8106) (LBB assigned rights to remedies to

LBHI, principal place of business was Delaware implicating New York’s “borrowing statute”).• LBHI claims indemnification law applicable: 6 year statute: Disputed

• GMAC/Ally Bank – 6 years (Minn. Stat. §541.05, subd. 1(1)).• Bank of America - 4 years (Cal. Civ. Proc. Code §337).• Chase - 6 years (N.J. Stat. Ann. §2A: 14-1; N.Y. C.P.L.R. §213 (McKinney)).• CMI – 10 years for contract dispute over payment of money (Mo. Ann. Stat. §516.110; see also

Hughes Dev. Co. v. Omega Realty Co., 951 S.W.2d 615, 617 (Mo. 1997)); 5 years for all actions upon contracts, obligations or liabilities (Mo. Ann. Stat. §516.120).

• Wells Fargo – 6 years (Minn. Stat. §541.05, subd. 1(1)).• RFC/ResCap – 6 years (Minn. Stat. §541.05, subd. 1(1))• Flagstar – 6 years (Mich. Comp. Laws Ann. §600.5807(8)).• Franklin America Mortgage Company – 6 years (Tenn. Code Ann. §28-3-109).• US Bank – 6 years (Wis. Stat. Ann. §893.43).•


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The Statute of Limitations Debate

• Investors argue that the statute of limitations (“SOL”) does not begin to run until a repurchase demand is refused by a lender, or until it suffers a loss with respect to an indemnification claim.

• Lenders generally argue that the SOL begins to run on the date of breach, generally the date of sale, though this date may be later in the case of an early payment default.

• A four judge appeals panel in New York unanimously ruled that repurchase claims, “did not accrue until defendant either failed to timely cure or repurchase defective mortgage loan, but rather, “accrued on the closing date of the [LPA].” Ace Securities Corp. v. DB Structured Products, Inc., 2013 WL 6670379 (New York Supreme Court, Appellate Division, No.11384 and M-5893, M-6111 and M-6133, December 19, 2013), which was recently upheld by New York’s Highest Court.

• A federal judge in Washington State, applying New York state law, ruled that the SOL for repurchase claims commenced on the date upon which the investor could have initially demanded payment for the alleged misrepresentations – i.e., the date the investor purchased the loan from the originator. See LBHI v. Evergreen, 793 F. Supp. 2d 1189 (2011).

– See also, Hahn Automotive Warehouse, Inc. v. Am. Zurich Ins. Co., 81 A.D.3d 1331, 916 N.Y.S.2d 678, 680 (2011), holding that “[a] cause of action for breach of contract accrues when the party making the claim possesses a legal right to demand payment….To find otherwise would allow an Investor to circumvent the statute of limitations by deferring its demand.”

– See also, Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., 2014 WL 1259630 (S.D.N.Y. March 27, 2014) holding that, when a contract involves a repurchase clause, “the general rule in New York is that ‘the cause of action accrues when the party making the claim possesses a legal right’ to make the demand, not when the demand actually occurs.”

• Conversely, Investors point to LBHI v. National Bank of Arkansas (“NBA”), which supports the position that a separate breach occurs when the originator fails to repurchase a loan, as required by contract.

– Note that much of the current SOL debate applies to NY state law and therefore only is controlling as to LPA’s which are governed by New York law, such as LBHI and Chase.


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The Impact of ACE Sec. v. DB Structured Prod.

• The ACE Sec. ruling applies only to New York law. Nevertheless, it may be used as persuasive authority in other states.

• On June 26, 2014, New York’s highest court – the Court of Appeals – accepted review. The primary issue was when the cause of action accrued.

• On June 11, 2015, the decision of the lower court relating to the statute of limitations was upheld. The Court of Appeals explained that “where, as here, the representations and warranties concern the characteristics of their subject as of the date they are made, they are breached, if at all, on that date.”

• The facts of case apply to “repurchase” demands and accrued on date of signing of agreement. However, we believe the decision is applicable to all claims involving breaches of representations and warranties, including indemnification claims, since it is dependent on, and derivative of the representations and warranties.


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The Impact of ACE Sec. v. DB Structured Prod. (cont.)

• Ace Securities should help refute LBHI’s “indemnification” claims:

• LBHI sued lenders in NY on claims of “contractual indemnification” & declaratory relief where gravamen of claims are breaches of representations and warranties

• LBHI claims accrual date is January 22, 2014 when settled claims with agencies

• Base their position on inapposite equitable indemnification law – McDermott v. City of New York, 406 N.E.2d 460 (N.Y. 1980)

• Bankruptcy Judge ruled in LBHI’s favor in the cases based on McDermott and reasoning from U.S. District Court in Colorado decision which uses Virginia law

• Ace Securities’ reasoning is persuasive authority from the highest court in New York because it held that a) claim accrued when reps and warrants were first false, and b) no separate cause of action is cognizable from a remedial provision


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The Statute of Limitations Debate in New YorkSignificance of Borrowing Statutes and Choice of Law Provisions in LPAs

• A typical LPA contains a “choice-of-law” provision of which state” law governs & can have ramifications later if the case ends up in litigation.

• Lehman Bros. and Chase have choice of law provisions in which New York law applies; • Bank of America/Countrywide LPAs are typically governed by California law; • CMI LPAs are governed by Missouri law;• Wells Fargo LPAs are governed by Minnesota law.

• Borrowing statues: Operate by “borrowing” the statute of limitations where a nonresident resides to prevent plaintiffs from shopping jurisdictions for the best possible statute of limitations.

• In Lehman Brothers LPA, there is an ongoing controversy concerning which statute of limitations applies.

• LBB assigned rights to LPAs to LBHI. • Under the statute, because LBB is a Delaware entity, Lehman must satisfy Delaware’s three-year

statute of limitations (10 Del Code section 8106) for breach of contract rather than New York’s six-year statute of limitations (NY CPLR section 213(2)).

• LBHI however is pleading its claims as one for “indemnification” to extend SOL


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The Statute of Limitations Debate (cont.)Significance of Borrowing Statutes and Choice of Law Provisions in LPAs

• CPLR section 202 is New York’s borrowing statute • New York law states that a cause of action that involves a purely economic injury to a corporate

entity accrues in that entity’s state of incorporation or principal place of business. Oxbow CalciningUSA Inc. v. Am. Indus. Partners, 96 A.D. 3d, 646, 651 (N.Y. App. Div. 2012).

• Application of borrowing statute in New York using the Lehman Bros. example:• If a nonresident of New York attempts to use New York’s more favorable statute of limitation

because it has a longer period, i.e., the 6 years for New York as compared to the 3 years for Delaware, New York will “borrow” and apply the shorter Delaware statute of limitation.

• Why is this an issue for Lehman Bros. LPAs?• The Lehman LPAs contain a New York choice-of-law provision • LBHI argued that New York was LBB’s principal place of business when claims accrued• However, because LBB was a federally sponsored bank, its “home office” is its principal place

of business. 12 C.F.R. section 1263.18(b). • Several decisions in Colorado have applied this “borrowing statute” and deemed LBHI’s claims

time-barred. These cases are discussed later in the presentation.


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Statute of Limitations Arguments In California• Unlike New York law, because there has yet to be any case law on point with these issues in California, it is

currently unclear on when the statute of limitation begins accruing.

• Investors, such as Bank of America, argue that the statute of limitation begins accruing when it suffers a loss, i.e. indemnifies a GSE, which it argues is a separate cause of action from that of the underlying breach of contract.

• Note that Bank of America settled with FNMA and FHLMC in 2010 and 2013. Therefore, any loans settled in the 2010 settlement are surely expired, even under Bank of America’s theory of the statute of limitations.

• However, correspondent lenders still have good legal arguments supporting their position that a breach of contract claim in California accrues at the time of breach, usually on sale of the loan.

• “The statute of limitations to be applied is determined by the nature of the right sued upon, not by the form of the action or the relief demanded.” Davies v. Krasna (1975) 14 Cal.3d 502, 515-516.

• Correspondent lenders can argue that the nature of a claim for repurchase or indemnification is a breach of contract, not an indemnification. Hence, if the LPA is breached as a result of a defective loan being sold, the statute of limitation should begin accruing at the time the breach occurred – i.e., when the loan was sold.


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Statute of Limitations Arguments in Missouri

• The State of Missouri has the longest statute of limitations period in the country for a breach of contract claim.

• A breach of contract claim in Missouri can last for 10 years. (The second longest statute of limitation on a breach of contract claim is the State of Montana with an 8 year statute of limitation).

• Missouri law has not been friendly to originators and lenders in lawsuits involving investors.

• Under a standard Form 200 Correspondent Agreement, such as the one CMI uses, a lender or originator agrees to repurchase a defective loan when the investor discovers the defect and is unable to deliver it to a third party investor such as Fannie Mae. CMI further argues, and has been successful in doing so, that the date on which the originator fails or refuses to honor the repurchase request/demand is the date on which the SOL begins running. An originator/lender’s argument that the investor failed to mitigate damages will not be considered. The damages incurred by the investor were not unforeseeable damages and were explicitly bargained for under the LPA. SeeCitiMortgage, Inc. v. Chicago Bancorp, Inc., 2014 WL 1315563, *1-*18 (E.D. Mo. March 31, 2014).


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The FDIC as Receiver for Failed Banks

• AMLG has seen a resurgence of FDIC claims represented by Mortgage Recovery Law Group.

• FDIC is making claims as Receiver of IndyMac, AmTrust Bank, and Washington Mutual.

• Former Indy Mac executive is investigator for Mortgage Recovery Law Group.

• Section 11(d)(14) of the Federal Deposit Insurance Act states the limitations period is 6 years, beginning to accrue from the date the FDIC is appointed Receiver to the failed bank, or when the claim accrues under applicable state law, whichever is longer.

• AMLG has litigated numerous claims against the FDIC represented by Mortgage Recovery Law Group, but has recently seen an upswing in demands for AmTrustbank for whom FDIC was appointed as receiver on December 4, 2009 rendering the SOL expiration date in December 2015.


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Causation Arguments• Can an investor show that the alleged breach of representations and warranties under

the LPA on individual loans actually resulted in the damages the investor is claiming from their global settlements with the Agencies?

• Major investors entering into global settlements with Fannie Mae or Freddie Mac are often unable to provide verifiable damage calculations on allegedly defective loans that were included as part of these settlements. These investors are unable to show there is a direct correlation or causal connection between the settlement damages they are claiming reimbursement/indemnification for and the defects they are alleging actually breached the representations or warranties under the LPA.

• This creates problems for lenders and originators because they are unable to verify, at the individual loan level, whether claimed defects with the loans actually caused the damages some investors are claiming.

• The issue of causation can overlap with claims of fraud and misrepresentation under the representations and warranties made in LPAs, which are tort claims requiring a showing of direct and proximate causation.


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Unilateral Attorney’s Fees Provisions• The vast majority of LPAs and Seller’s Guide have unilateral attorneys’ fees clauses.

This means that if an investor wins a case, it can recover its fees, but the lender/broker cannot. This fact must be considered carefully in litigation and settlement analysis.

• The vast majority of states do not contain protections against unilateral attorney fee provisions.

• In 7 states, unilateral attorneys’ fees clauses are automatically treated as bilateral; a reciprocal attorneys’ fees right is read into the contract by statute. These include:

– California (Cal. Civ. Code Section 1717);– Florida (Fla. Stat. Ann. Section 57.107(7);– Hawaii (Haw. Rev. Stat. section 607-14);– Montana (Mont. Code. Ann. Section 28-3-704); – Oregon (Or. Rev. Stat. Ann. Section 20.096);– Utah (Utah Code Ann. Section 78B-5-826); and – Washington (Wash. Rev. Code. Ann. Section 4.84.330). – Arizona implies reciprocal attorneys’ fees by decisional authority rather than statute.


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Residential Funding Company, LLC (“RFC”) Files 66 Complaints in Minnesota

• On May 14, 2012, Residential Capital, LLC filed for Chapter 11 protection in the United States Bankruptcy Court, Southern District of New York, claiming in excess of $1,000,000,000 in debt.

• RFC is a subsidiary of GMAC Residential Holding Company, LLC, which is a subsidiary of Residential Capital, LLC.

• On December 11, 2013, after more than 6,000 filings, the Bankruptcy Court issued its Order confirming the Second Amended Joint Chapter 11 Plan for Residential Capital, LLC.

• On December 13, 2013, and December 16, 2013, RFC filed 66 lawsuits in U.S. District Court, Minnesota. • The lawsuits involve claims for breach of contract and indemnification based on loans sold to RFC by the

Defendants.• RFC seeks compensation based on Section A208 (“Events of Default”) and A212 (“Indemnification”) of the GMAC-

RFC Client Guide. • The ResCap Liquidating Trust, which is alleged to be standing in the shoes of RFC, has since filed 15 matters in

the U.S. Bankruptcy Court in New York.• Most of the New York bankruptcy court Defendants have or will be filing motions to withdraw the bankruptcy

reference and to transfer to Minnesota, pursuant to the forum selection clause. Some of these motions have been successful.


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RFC Litigation Strategy

• The RFC contract is governed by Minnesota Law. Minnesota has a 6 year statute of limitation for breach of contract claims.

• According to Minnesota black letter law, an action based upon a breach of contract must be commenced within six years of the breach. Minn. Stat. § 541.05. subd.1(1). Specifically, a breach of contract action accrues at the time of the breach, even if actual damages occur later. Estate of Riedel by Mirick v. Life Care Ret. Communities, Inc., 505 N.W.2d 78, 81 (Minn. Ct. App. 1993).

• “A cause of action accrues when the action can be brought without being subject to dismissal for failure to state a claim.” Peggy Rose Revocable Trust v. Eppich, 640 N.W.2d 601, 609 (Minn. 2002) (citing Herrmann v. McMenomy & Severson, 590 N.W.2d 641, 643 (Minn. 1999)). Ignorance of the existence of a cause of action does not prevent the statue of limitation from running. Hermeling v. Minn. Fire and Cas., 548 N.W.2d 270, 276, (Minn. 1996), overruled on other grounds.


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Aurora/LBHI Litigation Lehman Brothers Holding (“LBHI”) and its progeny, Aurora Bank, filed lawsuits in both

federal and state courts in Colorado.

Five cases adjudicated by three different judges entered summary judgment in favor of defendant. LBHI appealed to the 10th Circuit. The cases have been consolidated.

As already alluded to under the statute of limitation section above, there have been a series of cases in both Colorado state and federal courts that have examined which state’s statute of limitations should be applied and whether a claim for a breach of contract or indemnification should be upheld.

See Lehman Bros. Holding, Inc. v. First Cal. Mortg. Corp., 2014 WL 1715120 (D. Colorado April 30, 2014).

See Aurora Bank, FSB v. Simonich Corporation, d/b/a/ BWC Mortg. Services, 2013CV344, Dist. Ct. of Douglas County, CO (May 13, 2014).


38

Aurora/LBHI Litigation (cont.)

LBHI filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York in 2008. The Court appointed a Plan Administrator/Trustee to manage the bank’s finances and to satisfy creditors.

In early 2014, LBHI settled disputes with Fannie Mae (for $2.15 billion) and Freddie Mac (for $767 million) concerning over 3,000 lenders and more than 11,000 “indemnification claims.” Under the settlements, Fannie and Freddie are to assist LBHI by providing sufficient loan-level information to allow LBHI to push back its losses onto the allegedly responsible lenders.

On May 29, 2014, LBHI filed a motion seeking mandatory mediation of the 11,000 outstanding mediation claims. The requested order provides a specific demand procedure with which lenders must comply or risk sanctions. It further provides that LBHI will select a mediator for a mediation that must occur in the Southern District of New York with costs to be split between the parties equally. As to most lenders, the Court entered the requested order on June 24, 2014.


39

Aurora/LBHI Litigation (cont.)Universal IV and V dissected

• February 2015 Bankruptcy Court for the Southern District of New York denied motions to dismiss.

• The Court denied motions based on Colorado US District Court case Universal V.

• Universal IV more applicable as context of claims are grounded in contract not tort law.


40

Aurora/LBHI Litigation (cont.)Security I and II dissected

• Security I established LBB suffered no damages and loans were sold to LBHI on a non-recourse basis.

• Security II does not supersede and, in fact, only denial of a motion.

• Security II may be dismissed in its entirety based on pending Motion to Dismiss which is waiting for 10th

Circuit LBHI v Universal American appeal.


4141

JPMorgan Chase Bank, N.A.

• Chase has been increasingly litigious and has become more inclined to sue its lenders for just one or two loans.

• The law governing the Chase LPA is often New Jersey state law. However, some Chase LPA’sare governed by New York law. Both have a 6-year statute of limitations for a contract claim (N.J. Stat. Ann. 2A: 14-1 (2011)) and adopts the accrual-at-breach rule. See Holmin v. TRW, 330 N.J.Super. 30, 35 (App.Div.); See also Soward v. Deutsche Bank AG, 814 F. Supp. 2d 272, 284 (S.D.N.Y. 2011).

• When dealing with Chase, lenders should take note of which choice of law provision governs their LPA. Unlike other large investors, who usually choose one particular state’s law to govern their LPA, Chase LPAs may be governed by the law of one of many different states.

• If you are being sued by Chase, you might want to consider deposing its underwriters. According to its internal emails and employee interviews, Chase has consistently dismissed, and at times whitewashed, the negative quality-control reports about the mortgage loans so that the loans would appear healthier.

– http://dealbook.nytimes.com/2013/02/06/e-mails-imply-jpmorgan-knew-some-mortgage-deals-were-bad/


4242

Bank of America Litigation

• Bank of America has not been very litigious, to date, with respect to repurchase actions, but with tens of millions of dollars in unresolved claims, AMLG expects that this may change in the not-too-distant future.

• Nonetheless, there are several things to consider if you are served with a Bank of America repurchase or indemnification demand:

– Governing law: California law;– Statute of limitation: Four (4) years for a breach of contract claim (Cal. Civ. Proc.

Code §337). Lenders should persuade the court to adopt the ACE Sec. holding;– Causation arguments; and– California’s absolute right to a jury trial.


4343

CitiMortgage, Inc.• CMI has started to become much more aggressive when it comes to filing lawsuits related to its

repurchase demands, in part due to the windfalls it has received by litigating in the Eastern District of Missouri:

– The court has upheld Citi’s calculation of repurchase prices (Section 2301 of the CMI Manual), which does not take into account of the adequacy and reasonableness of its liquidation procedures;

– The court has also held that, despite the knowledge clause of Section 2(i) of the LPA, Section 11(ii) allowed Citi to demand repurchase even if the lender complied with the CMI Manual; and

– In one case, the court held that, “there can be no bad faith if [CitiMortgage] simply performed the actions expressly granted it by the parties' agreement, including determining that loans were defective and needed to be repurchased.” See CitiMortgage, Inc. v. Just Mortg., Inc., 4:09 CV 1909 DDN, 2012 WL 1060122 (E.D. Mo. Mar. 29, 2012).

• The Court has denied lenders’ requests to depose several of the CMI whistleblowers regarding CMI’s questionable lending practices and internal quality control.

• We believe the court’s holding on the damage calculation is erroneous because it did not consider (1) CMI’s efforts to mitigate its damages as required by law; and (2) whether damages were actually suffered.

• As already noted in the previous statute of limitation section, Missouri courts have not come out with favorable decisions on behalf of lenders and sellers. This could soon change, however, pending the outcome of the Chicago Bancorp appeal.


44

Flagstar Bank, FSB

• Flagstar has become more litigious and has sued its correspondent lenders for one or two loans.

• Flagstar is becoming more aggressive with regard to repurchase settlements and is usually unwilling to settle claims for less than 45 to 50 cents on the dollar.

• Flagstar typically files suit in Michigan. Michigan state courts have been extremely favorable to Flagstar. If possible, it would be worthwhile to remove any litigation to federal court. Further, if the underlying subject property is also located in Michigan, determine whether the Full Credit Bid Rule applies.

44Important Notice(s): The American Mortgage Law Group, P.C. ("AMLG") makes available the information (the "Information") in this presentation for general informational purposes only. The Information is not intended to constitute, and does not constitute, legal advice. The Information is not intended to constitute, and does not constitute, a solicitation for the formation of an attorney-client relationship. No attorney-client relationship is created through your use of the or your receipt of the Information contained within the Presentation. AMLG accepts clients only in accordance with certain formal procedures, and renders legal advice only after the completion of those procedures, and/or completion and execution of an appropriate retainer agreement.

4545

Wells Fargo Bank, N.A.• Wells Fargo has been increasingly litigious and typically files suit in

Minnesota.

• However, Wells Fargo has been open to business-to-business settlement negotiations, even after litigation has been commenced.

– Accordingly, if Wells Fargo is threatening suit or has filed suit against you, we recommend engaging in business-to-business settlement discussions – to the extent the terms and conditions are reasonable.

• A federal judge rejected Wells Fargo’s bid to dismiss a U.S. government lawsuit accusing Wells Fargo of fraud.

– http://www.reuters.com/article/2013/09/24/us-wellsfargo-lawsuit-mortgage-fraud-idUSBRE98N0WT20130924


46

Franklin American Mortgage Company

• Franklin American Mortgage Company (“FAMC”) has become more litigious in recent months.

• FAMC is filing suit in Tennessee as its LPA is governed by Tennessee law.

• FAMC has been inclined to sue for only one or two loans and has a litigation threshold of as little as $250,000.

• FAMC typically employs solo practitioners to pursue its claims. These attorneys often stall the litigation process, resulting in cases that drag on for long periods of time.


47

Litigation Settlement Strategies

• Due to the high cost of litigation, investors are often more willing to negotiate once litigation has commenced.

• Challenge the loss figures claimed by the investor.

• Request that the investor remove all prejudgment interest for the purposes of settlement negotiations.

• Consider a global settlement with the investor to resolve all known and unknown claims.


48

Part IV:

FHFA New Representation and Warranties Framework

In 2012 FHFA published a new representation and warranty framework, which was subsequently updated and enhanced in 2014.


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Agency Representation and Warranty Framework

• The 2012 Framework was split into two versions.

• Version 1 of the representation and warranty framework applied to conventional loans sold or delivered on or after January 1, 2013, and before July 1, 2014.

• Version 2 of the representation and warranty framework was announced on May 12, 2014, and applies to conventional loans sold or delivered on or after July 1, 2014. Version 2 of the Framework was announced in FNMA Selling Guide Announcement SEL-2014-05, and in FHLMC Bulletin 2014-8. This is the current version in effect.

• Under the framework:– Lenders were relieved of certain repurchase obligations for loans that meet specific payment

requirements. had no 30-day or greater delinquencies during the first 12 months following the acquisition date; or

– (i) had no more than two 30-day delinquencies, and no 60-day or greater delinquencies, during the first 36 months following the acquisition date; and (ii) was current as of the 36th

month following acquisition


50

November 2014 Updates

Updates to the Life-of-Loan Selling Representations and Warranties as well as to Compliance with Applicable Law Sections issued in November, 2014

Changes to the Representations and Warranties were made retroactively effective for mortgages with Settlement Dates on or after 1/1/13, except for mortgages where a repurchase request was issued prior to these updates.

Changes to Compliance with Applicable Law were effective immediately and applied to mortgages with Settlement Dates on or after November 20, 2014. For Fannie Mae, this section is effective for whole loans purchased on

or after November 20, 2014 and for mortgage loans delivered into MBS with pool issue dates on or after 12/1/2014.


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Updates to Misstatements, Misrepresentations and Omissions

For any mortgage obtaining relief under the framework, the mortgage must not have any misstatements, misrepresentations or omissions (collectively, “Misrepresentations”) by any part to the transaction pertaining to the Borrower, Mortgage Premises or project in which the Mortgage Premises is located, that are made with or without Seller’s knowledge, and that:

Involve 3 or more Mortgages sold by the same Seller; and Were made pursuant to a common pattern of activity in connection with the

Mortgage origination or sale based on information or other facts existing on the Settlement date; and

Are “significant” in that either (a) Freddie/Fannie determines that the mortgage would not have been eligible for sale under the Seller’s Purchase Documents in effect on the Settlement Date, or (b) Fannie/Freddie determines the Mortgage would have been eligible for sale but under different terms.


52

Updates to Data Inaccuracies in Life-of-Loan Representations

The Mortgage must not have any Uniform Loan Delivery Dataset (ULDD) inaccuracies pertaining to the underwriting of the Borrower, Mortgaged Premises or project in which the Mortgaged Premises is located, if and to the extent:

The data inaccuracies affect 5 or more Mortgages and involve the same delivery data element; and

The ULDD data differs from the information in the Mortgage file; and The Data inaccuracies are “significant” in that, using the information from the

Mortgage file to qualify the Borrower, Mortgaged Premises, or project, either (a) it is determined the Mortgage would not have been eligible for sale under the Purchase Documents, or (b) it is determined the Mortgage would have been eligible for sale but under different terms.


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Updates to Compliance With Laws Section

Previously, Fannie and Freddie could enforce a remedy, including request to repurchase, for all Seller violations of applicable federal, state, and local laws, ordinances, regulations, and orders. To provide transparency and certainty, they have limited those situations in which they can issue a repurchase request to violations of law that:

Could be expected to impair FNMA/FHLMC or their Servicer’s ability to enforce the Note or Mortgage; or

Impose assignee liability; or Are found to have been violations of, or if FNMA/FHLMC made a finding based

on facts available to them, that a violation may have occurred, of one or more of the following laws or related regulations: OFAC; Fair Housing Act; ECO; UDAAP; or Securities Exchange Act of 1934


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Effects of the Framework on the Repurchase Landscape

• The representations and warranty framework moved the quality control review process from the time a loan defaults to the time the loan is delivered to Fannie Mae or Freddie Mac, generally between 30 to 120 days after loan purchase.

• Lenders will likely experience an increase in the number of performing loans that are selected for review, as well as an increase in the number of upfront rejections.


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Tips to Minimize Future Buybacks Under the New Framework

• Implement internal procedures to ensure quality underwriting. This includes:– Fully complying with the underwriting guidelines.– Pulling the credit report once more right before or on the date of the

closing.– Asking the borrower if anything has changed since the application.– Putting the closing agent on notice. Make a special note in the closing

instructions to instruct the closing agent to watch out for any recent transactions it closed for the same borrower.

• Request written authorization from the closing agent that the borrower and/or subject property were not involved in residential mortgage transactions within the 36 months prior to the subject transaction.

– Considering conducting your own post-closing audit.


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Part V:Concluding Thoughts

• As repurchase demands on vintage loans are slowing down, we anticipate that litigation will continue to ensue at a rapid place until such time state-specific courts settle upon the legal issues on point with these aged claims. We also expect to see a faster turnaround and/or more upfront rejections on new loans under the new Agency representation and warranty framework.

• Regulatory compliance should also be a lender’s top priority. A lender should always stay on top and remain updated to new regulations.

• Consider outsourcing your repurchase issues to a law firm.

• If you are signing a new LPA, have your attorney review it and try to include a knowledge requirement (i.e. make sure that that you are required to repurchase a loan only if you were aware of the defect at the time of origination).


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