Mortgage lenders are facing pressure from investors and lawyers to buy back bad mortgages. If successful, these efforts could make it more difficult to refinance those mortgages.
High profile investment attorneys David Grais and Talcott Franklin are trying to organize a consortium of institutional investors that bought mortgage-backed securities from major banks, the Reuters news service reported last Thursday. This consortium would sue banks that issued securities backed by risky mortgages - if they didn’t buy back the securities.
Another group of lawyers is planning a lawsuit against Bank of America on behalf of other investors, media reports indicate.
The lawyers contend that major lenders like Bank of America and Wells Fargo sold securities backed by shaky mortgages. They also allege that the lenders were bundling mortgages likely to end up in foreclosure in securities and selling them to investors. Such questionable mortgage-backed securities helped cause the collapse of prominent investor banker Lehman Brothers and trigger the financial crisis.
Unclear What the Results Will Be
It is unclear what the results of these efforts will be or how they could affect the mortgage market. One possible outcome is to make it harder to refinance mortgages or foreclose on some homes because it will be unclear who holds title to the mortgaged properties.
It could also make it even harder to get a mortgage because banks could have no market for mortgage backed securities. Without such a market, it could be harder for banks to find non-FHA financing for mortgages.
The mess could also do serious damage to banks because of the huge amounts of money potentially involved. Laurie Goodman an analyst at Amherst Securities told Reuters that banks could have to buy back up to $97 billion worth of mortgages. Wells Fargo has apparently already put aside $1.3 billion to buy back mortgages from investors.
Buying back mortgages from investors could really hurt some banks and the economy. If the banks have to use their credit to buy back mortgages they will have less money to lend. Some banks could conceivably be forced into default or to seek federal aid to get money to buy back mortgages.
Not Clear What Will Happen to Properties
It is also not clear what will happen to the mortgaged properties involved in such a buy back. Many of the homes involved are already in foreclosure or in legal battles over title and foreclosure between lenders and homeowners.
If lawsuits are filed over this issue it could be hard for a person to get legal title to a foreclosed home. This could make it even harder to foreclose on those homes or put them back in the real estate market.
How these investor efforts will affect the Obama administration’s efforts to set up a mortgage modification effort to help people stay in their homes is difficult to see. The administration has been trying to set up a Short Finance program to help persons avoid foreclosure on mortgages not issued by Fannie Mae and Freddie Mac. The Short Finance program would try to replace private mortgages that homeowners can’t pay with smaller FHA-backed mortgages.
Since the investor lawsuits would be aimed at private mortgage lenders, holders of mortgages involved in the administration’s Short Finance Program would presumably be targeted. This could make it difficult for the administration to replace private mortgages with FHA-backed ones which is the basis of Short Finance.
Legal Consequences Unknown
It is not known how much investors could conceivably sue mortgage lenders for or how long the lawsuits would take. Any legal action would be complicated by mortgage documentation issues.
It is also likely that the investors would reach some sort of settlement with mortgage lenders. The settlement would probably be an agreement for the lenders to buy back the bad mortgages.
To win their lawsuit or force such a settlement the investors would have to prove that the lenders did not perform due diligence when they issued the mortgages. This could be difficult because of robo signing and other fast mortgage processing methods.
Why Banks Might Settle
Banks might want to settle such a lawsuit fast because in a civil action attorneys would have a right to subpoena their documents. This could lead to more revelations about incompetence, mismanagement and fraud in the mortgage process which would conceivably lead to more lawsuits.
It could give attorneys suing lenders on behalf of persons who underwent foreclosure more ammunition for lawsuits or class action lawsuits. America’s second largest mortgage servicing outfit; Wells Fargo, has already admitted that it will have to amend 55,000 foreclosures.
Investors’ Action could have been prompted by Homeowner Lawsuits
The investors’ actions could also be an effort to keep holders of mortgage-backed securities from being named in lawsuits filed on behalf of persons whose homes were foreclosed. There have been media reports that networks of trial attorneys are organizing to file lawsuits against mortgage lenders over the foreclosure issue.
By launching their own lawsuits, investors could be trying to deflect consumer lawsuits and limit their liability. Investors could also be leery of lawsuits from buyers of foreclosed homes unable to get clear title because of this scandal.
One thing is clear this legal action is going to make it more difficult to resolve the foreclosure crisis. It could also make it more difficult to refinance a lot of mortgages.