Mortgage Fraud

US Government Places Restrictions on Wells Fargo, JP Morgan Chase, and Other Banks for Not Complying with Orders Related to Foreclosure Abuses

Published on: June 17, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Office Comptroller of the Currency has placed restrictions on the mortgage-servicing operations of J.P. Morgan Chase & Co (JPM), Wells Fargo & Co. (WFC), HSBC Holdings PLC (HSBC), Everbank Financial Corp. (EVER), U.S. Bancorp (USB), and Santander Holdings USA Inc. for their failure to totally comply with enforcement orders related to home foreclosure abuses. The OCC said that the banks did not satisfy all the requirements in consent orders that were issued in 2011 over foreclosure processing errors.

Under agreements reached with regulators, most of the biggest mortgage services in the country have consented to pay billions of dollars and fix their controls and systems to resolve claims that they robo-signed, improperly handled loan papers, or fraudulently endorsed affidavits used in foreclosures following the 2008 financial crisis. The banks are accused of improperly putting into motion hundreds of thousands of home foreclosures without assessing each case individually.

The enforcement orders led to scrutiny into US banks’ foreclosure files to assess how many borrowers should be compensated. However, in 2013, the Federal Reserve and the OCC stopped the probe without concluding its investigation.

DOJ Prepares Mortgage Fraud Cases Against More Banks

Published on: June 6, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, the U.S. Department of Justice and state officials are readying more mortgage fraud cases against up to nine banks, with resolutions against Morgan Stanley (MS) and Goldman Sachs Group (GS) possibly finalized as early as later this month. Most negotiations are reportedly in the earlier stages and could go on for months.

The cases are over residential mortgage-backed securities that fell in value during the economic crisis. Individual securities cases are expected rather than a collective agreement. Other banks that are expected to settle include Credit Suisse Group AG (CS), Barclays PLC (BARC), HSBC Holdings PLC, Deutsche Bank AG (DB), UBS AG (UBS), Royal Bank of Scotland Group PLC (RBS), and Wells Fargo & Co. (WFC).Settlements could range in size from a few hundred million dollars to up to $3 billion depending on the extent of misconduct allegedly involved.

Also likely to be involved least some of the RMBS cases are the attorneys general of Illinois, Massachusetts, New York, and other states that also took part in the earlier rounds of RMBS fraud cases against banks.

SEC Settles With Ex-Freddie Mac Executives Over Allegations They Mislead Investors Over Mortgage Risks

Published on: April 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has reached as settlement with three ex-Freddie Mac executives accusing them of knowingly misleading investors about the quality of high-risk mortgages that the company bought heading into the end of the housing boom several years ago. The former executives are ex-Freddie Mac (FMCC) CEO Richard Syron, ex-chief business officer Patricia Cook, and former senior VP of credit policy and portfolio management Donald Bisenius. The SEC accused the three executives of saying that there was little subprime exposure for Freddie even as they bought more loans with subprime qualities.

Under the agreement, the three ex-executives agreed that they wouldn’t sign certain reports that are required by finance chiefs or chief executives for a certain period of time, and would pay $310,000 to a fund to pay back bilked investors. Insurance from Freddie Mac will cover the amount.

Considering that the regulator tried to get bars to prevent the three of them from serving as company directors or officers, as well as pay financial penalties, the agreements reached highlight the challenges the U.S. has had in bringing and winning cases against individual executives over the 2008 economic crisis.

Nomura Holdings Goes to Court in FHFA Mortgage Case Alleging that Freddie Mac and Fannie Mae Were Misled

Published on: March 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Nomura Holdings (NMR), one of 18 financial institutions (including Goldman Sachs (GS), Deutsche Bank (DB), Bank of America (BAC), and J.P. Morgan (JPM)) that was sued by the Federal Housing Finance Agency for allegedly misleading Freddie Mac (FMCC) and Fannie Mae (FNMA) about the risks of mortgage-backed securities leading up to the financial crisis, is getting ready to go to court next week after refusing to settle with the government. The Japanese bank contends that not only did the two mortgage giants go looking for mortgage pools, but also they sought to make sure that certain of these mortgages would allow them to meet the Department of Housing and Urban Development’s affordable housing goals.

According to Nomura’s legal team, when choosing the loans as part of the loan groups that would support the tranches they planned on buying, Fannie and Freddie “carefully analyzed loan-level data” to make sure that the loan pools behind their certificates contained “as many goal-qualifying loans as possible.” This would suggest that while a lot of investors were trying to avoid risky loans to individuals that had low credit scores, Freddie and Fannie were doing the opposite by looking for high risk loans while making money with fat interest-rate yields—meaning they knew the risks they were taking on.

In other Nomura-related news, one of its ex-traders, Matthew Katke, has entered a guilty plea for conspiracy to commit securities fraud following a federal indictment against him. Katke traded in collateralized loan obligations and misled customers.

Appellate Court Says Charles Schwab & Co. Must Face Financial Advisory Firm’s Lawsuit Over Mortgage Debt Involving Bond Funds

Published on: March 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A panel of U.S. Judges says that Charles Schwab & Co. (SCHW) must face a lawsuit brought by Northstar Financial Advisors Inc. The investment advisory firm claims that Schwab invested the assets of a bond-index fund in high-risk mortgage debt prior to the financial crisis. The plaintiff is proposing that this case be a class action securities claim, which could include investors who have owned the fund since 2007. In particular, notes Northstar Financial Advisors Inc., the Schwab Total Bond Market Fund (SWLBX) placed lots of risky debt into the fund, resulting in losses of tens of millions of dollars, as well as underperformance against its benchmark.

Reuters reports that the plaintiffs claim that because Schwab invested over 25% of assets in non-agency mortgage securities and collateralized mortgage obligations, the firm’s portfolio managers disregarded the fundamental investment objectives of the fund to track the Lehman Brothers U.S. Aggregate Bond Index and stay away from industry bets. Because of this, they argued, the fund lagged its benchmark from 9/1/07 to 2/27/09, suffering a 4.80% loss while the index posted a 7.85% positive total return.

Northstar Financial Advisors Inc. filed its securities case in 2008 but the complaint was mired in procedural matters until now. This latest appeal was argued in 2013 in front of three federal judges of the 9th U.S. Circuit Court of Appeals in San Francisco. Their decision, finally—albeit nearly two years later—reinstates the breach of fiduciary duty, breach of contract, and other claims.

DOJ Gets Ready to Wrap Mortgage Bond Case Against Standard & Poor’s, Probes Moody’s

Published on: January 31, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, the U.S. Department of Justice has been meeting with ex-Moody’s Investor Service (MCO) executives to talk about the way the credit ratings agency rated complex securities prior to the 2008 financial crisis. Sources say that the probe is still in its early stages and it is not certain at the moment whether the government will end up filing a bond case against the credit rater.

DOJ officials are trying to find out whether the company compromised its standards in order to garner business. The government’s focus is on residential mortgage deals that took place between 2004 and 2007.

Moody’s and credit rating agency Standard and Poor’s gave triple A ratings to the deals so that even conservative investors were buying the subprime loan-backed securities. The investments later proved high risk. When the housing market failed, the bond losses cost investors billions of dollars.

JPMorgan to Pay $500M to Resolve Mortgage Settlement Involving Bear Stearns, Says Source

Published on: January 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Reuters and Bloomberg are reporting that according to person familiar with the case, JPMorgan Chase (JPM) has consented in principal to resolve a class action case related to Bear Stearns’ sale of $17.58B of faulty mortgage securities for $500 million. JPMorgan purchased Bear Stearns in 2008.

The agreement settles claims that Bear Stearns violated federal securities laws when, from May 2006 to April 2007. it sold certificates backed by over 47,000 primarily subprime and low documentation “Alt-A” mortgages in over a dozen offerings. Almost all certificates were eventually reduced to “junk” status even though 92% of them had been given “trip-A” ratings previously.

The plaintiffs, led by the New Jersey Carpenters Health Fund and, the Public Employees’ Retirement System of Mississippi, claim that offering documents included misleading and false statements about underwriting guidelines that Bear’s EMC Mortgage unit and other lenders used, as well as inaccuracies related to associated property appraisals. According to the lawsuit, because of the omissions and false statements, the class bought certificates that were a lot risker than what they were represented as and unequal in quality to other investments that received the same credit rating.

Whistleblower Earns $57M Payout in Second Lawsuit Against Bank of America

Published on: December 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Edward O’Donnell, an ex-Countrywide Financial executive, will receive $57 million for a second whistleblower lawsuit accusing parent company Bank of America Corp. (BAC) of fraud. In this case, O’Donnell accused a Countrywide unit of bilking Freddie Mac (FMCC) and Fannie Mae (FNMA) through the sale of home loans. Bank of America consented to settle the case for $350 million as part of a wider $17 billion deal to settle mortgage fraud claims.

For filing his whistleblower lawsuit, O’Donnell’s share is 16% of the recovery plus another $1.6 million. His award comes from the part of the settlement that the bank reached with federal prosecutors and the states of Illinois, New York, California, Maryland, Delaware, and Kentucky.

He has yet to collect money from the other case, in which a jury found Bank of America liable for shoddy mortgage sales. That lawsuit revolved around the “hustle,” which was a program that rewarded employees for producing loans even if their quality was poor.

Wells Fargo Sued Over Allegedly Biased Lending in Chicago

Published on: November 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Cook County, Illinois is suing Wells Fargo & Co. (WFC) for engaging in purportedly predatory and discriminatory lending practices in the Chicago area. The county said that the U.S. mortgage lending company targeted female, Hispanic, and black borrowers.

Per the mortgage lending lawsuit, for over a decade Wells Fargo discriminated against female and minority borrowers in the area to increase profits. Cook County claims that the bank went after borrowers from the time the loans were created through foreclosure and even during equity stripping, which included unnecessary or inflated fees and rates and refinancing penalties. The county believes its property tax base was eroded, it had to spend money to deal with abandoned properties, and some 26,000 borrowers were impacted. Cook County says damages could be as high as $300 million or greater.

It wants to stop Wells Fargo’s alleged practices and is seeking punitive and compensatory damages. Cook County also notes that certain practices involved the former Wachovia Corp, which Wells Fargo now owns. Meantime, the bank says that the accusations in the mortgage lending lawsuit have no merit.

$13B JPMorgan Chase Mortgage Settlement Was Not Sufficient, Says Whistleblower

Published on: November 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Alayne Fleischmann, the whistleblower who gave the evidence which helped resident in a $13 billion mortgage settlement from JPMorgan Chase(JPM) to the U.S. Department of Justice last year, that amount was not enough. Fleischmann, a lawyer, joined the financial firm as a deal manager in 2006.

She says that not long after she started working there she noticed that about half of the loans in a multimillion-loan pool included overstated incomes. Such loans, she said, were likely at risk for default—a precarious position for both the investors and the securities. Fleischmann said that she notified management about how the bank was re-selling subprime mortgages to customers without letting them know about the risks. She also spoke about how one bank manager wanted to put in place a non-email policy so there would be no paper trail to show that the firm was aware that such activities were happening.

It was the sale of toxic sub-prime loans by JPMorgan and other US banks that incited the US housing market crisis, which eventually spurred the global financial meltdown of 2008. Repackaged loans were sold to pension funds and other institutional investors, with many buyers unaware of the high default risks involved.