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Continued Court Losses and Payouts Piling Up for Big Banks

With the news of an imminent settlement in the state AG foreclosure fraud investigation, and a BofA settlement with investors over representations and warrants on mortgage backed securities, you would think the industry would be in good shape to put the mess they created behind them. That’s certainly what they want you to think. But read between the lines of some recent decisions and you’ll see something different. First of all, both the AG settlement and the BofA settlement may be blown up, perhaps by the same person, New York Attorney General Eric Schneiderman. There are additional settlements happening all the time on investor repurchase lawsuits, some bigger than others.

But in the courts, the banks are not having a good track record of late. A case in the Nevada Supreme Court is indicative. Adam Levitin writes:

Both cases arise from Nevada’s foreclosure mediation program. In one case, Pasillas v. HSBC Bank USA, the Nevada Supreme Court ordered sanctions against HSBC for failing to mediate in good faith. What was the failure? HSBC failed to show up at the mediation with the required loan documentation, namely two pages of the mortgage note were missing, the assignment to HSBC was incomplete, a BPO rather than an appraisal was provided. Moreover, HSBC didn’t show up at the mediation with authority to settle because it still required “investor approval.” The foreclosure mediator refused on these ground to authorize the foreclosure. The district court ordered the foreclosure to proceed, but the Nevada Supreme Court reversed the ruling and remanded with instructions for the district court to determine appropriate sanctions.

Three things are of note in this case. First, it shows that the Nevada Supreme Court takes a very serious view of enforcing the requirements of the state’s foreclosure mediation program. This was a unanimous decision. Second, it’s another illustratation of the mortgage documentation SNAFU. And third, there’s a very long footnote discussing and endorsing the Massachusetts Supreme Judicial Court’s ruling in Ibanez v US Bank: “We agree with the rationale that valid assignments are needed when the beneficiary of a deed of trust seeks to foreclose on a property.” That’s now two states Supreme Courts now that are making clear that there’s got to be good chain of title. We can add to that the NC Court of Appeals and arguably New Jersey.

All of this brings us to the second case, Levya v. National Default Servicing, Inc., another unanimous decision. Again, this case arose from a foreclosure mediation. At the mediation, Wells Fargo produced a certified original copy of the note and deed of trust naming another entity as the lender. Wells did not produce any assignments, just a notarized statement that it was in possession of the original note and DOT and any assignments thereto. (Gosh, I wonder if that employee had personal knowledge of the fact or not… Do you really think the employee looked at the physical paper?). The mediator found that Wells Fargo hadn’t met the statutory requirements for the mediation, but didn’t make a finding of bad faith. The homeowner petitioned the district court for review, arguing that Wells Fargo acted in bad faith and should be sanctioned. The district court concluded that there was no bad faith. The Nevada Supreme Court reversed on appeal.

Levitin believes that this proves how hasty and misguided the BofA settlement is, because the system is so rife with problems. I’m sure some investor groups and the NY AG are watching.

The industry simply hasn’t learned from its mistakes, and continues to try and paper over problems with false documents. We’re even starting to see illegal military foreclosures again, after the industry swore up and down they would no longer foreclose on anyone in active duty. The celebrated case in Oregon of an active-duty soldier about to return home to a foreclosure is another example. Jay Rockefeller and Elijah Cummings held a forum on military foreclosures this week. The fact that they can’t even fix this simple problem – don’t foreclose on someone on active duty – shows that the system is fatally flawed.

The point is that the industry has not come close to fixing the market, and this is having a material impact on their bottom line. The SEC is investigating:

Officials at the Securities and Exchange Commission are looking closely at banks’ estimates of possible liability in the wake of a surprise June 29 announcement that Bank of America Corp. would take mortgage-related charges of $20.6 billion during the second quarter, the people added. The total cost was greater than some investors and analysts had expected.

U.S. accounting standards require banks to set aside money to cover “probable and estimable” losses from legal challenges or investigations. They also have to disclose “reasonably possible” losses, as well as the estimated range of such losses. Litigation that has only a remote chance of success doesn’t have to be disclosed.

The SEC is focusing on whether banks are doing enough to disclose the “reasonably possible” category of losses. Officials in the agency’s corporation finance division are reviewing banks’ regular filings to determine whether shareholders have been given fair warning of the mounting future liabilities, according to people familiar with the matter.

The SEC scrutiny highlights the challenges large banks face as they struggle to put the financial crisis behind them and soothe investor concerns about their profitability. Most are reeling from mortgage liabilities accumulated before the housing bust and are under pressure to disclose as much as possible about how big those costs could be. But banks also are reluctant to show their hand on settlements still being negotiated.

In other words, shareholders have no idea about liability. Maybe the banks don’t, either.

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David Dayen

David Dayen