Mortgage Repurchase Demand Litigation. Lauren Campisi McGlinchey Stafford PLLC

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1 Mortgage Repurchase Demand Litigation Lauren Campisi McGlinchey Stafford PLLC

2 Anatomy of a Repurchase Demand Government Sponsored Entity or Investor Entity ( Purchaser ) contracts with Loan Aggregators to permit Purchaser to put loss back to Loan Aggregator if there is a breach of representations or warranties. Loan Aggregator contracts with Originating Banks or Lending Institutions ( Originators ) to permit Loan Aggregator to put loss back to Originator if there is a breach of representations or warranties. Purchasers make repurchase demand to Loan Aggregators. Loan Aggregators make repurchase demand to Originators. Disconnect between the representations and warranties made by the Aggregators to the Purchaser and those made by Originator to the Aggregator

3 Sample Repurchase Obligations Originator must repurchase if: Loan contains any fraudulent document regardless of whether or not such loan is delinquent Any loan underwritten by originator which is deemed to have fraud or underwriting deficiencies resulting in a repurchase request from any agency as FNMA, FHLMC, FHA, VA or any private investors Who did the underwriting Separate delegated underwriting representations and warranties Any representation or warranty of originator with respect to the mortgage loan is determined by buyer to have been false or any other event of default with respect to the mortgage loan shall have occurred. Originator must repurchase the related Loan (or Property, if title thereto is held by Aggregator), at the Repurchase Price if Aggregator repurchases any Loan previously conveyed, transferred, or assigned by Aggregator to any third party due to defects which existed prior to, or arose as a result of an occurrence on or before the Purchase Date

4 Typical Alleged Violations of Representations and Warranties Regulatory Compliance Statutory Disclosures (TILA, etc ) Borrower Status (income level, employment status, etc ) Fraudulent Leases Loan to Value Ratio or Debt-to-Income Ratio Occupancy Absence of Fraud Appraisal Credit Application

5 Problems Do Terms of Representations and Warranties in contracts between Loan Aggregators and Purchasers mirror those between Originators and Loan Aggregators? Can Loan Aggregator put back loan to Originators for same reasons that the Purchasers can do so to Loan Aggregators? Is there causation between the loss suffered on the loan and the justification for the repurchase demand? Does state law require a nexus between the justification for the repurchase demand and the loss suffered? Does it matter that the financial crisis caused the decline in value, rather than the breach alleged in the repurchase demand? Claim that Aggregator would never have purchased the loan vs. Originator s claim that alleged deficiency did not cause the loss

6 More Problems How long has Investor owned the loan? What happens when Purchaser orders their servicer to do an immediate foreclosure and does not put the loan back to the aggregator? If the only remedy is repurchase, what relief can be requested when Purchaser has foreclosed and no loan exists? Originator can claim they would have gotten a better price. What basis does Loan Aggregator have for claim if Originator refuses demand? What happens when Purchaser has foreclosed and released borrower from deficiency? Purchaser s actions have taken away Originator s remedy against the borrower.

7 Overview of Noteworthy Cases MBIA Insurance Corporation v. Countrywide Home Loans, Inc., et al. Lehman Brothers Holdings, Inc. v. Key Financial Corporation Wells Fargo Bank, N.A. v. LaSalle Bank National Association MBIA Insurance Corporation v. GMAC Mortgage, LLC Resolution Trust Corporation v. Key Financial Services, Inc.

8 Indemnification The vast majority, if not all, of the contracts subject to repurchase demands include indemnification provisions. These provisions raise a number of questions. What is the Scope of the indemnification provisions? Do the indemnification provisions apply to any loss of any nature by the Aggregator?

9 Sample Indemnification Agreements Originator shall indemnify, save and hold harmless Loan Aggregator, its successors and assigns from any and all loss, fines, costs, damages, and expenses (including attorney and professional fees) of Loan Aggregator resulting from: any obligation of Loan Aggregator to repurchase any loan or property held as security for any loan arising from any defect or omission in any loan underwritten by Originator, including but not limited to any defects or omission in the appraisal. Originator s breach of any representation or warranty Originator hereby agrees to indemnify, save, and hold harmless Aggregator, its successors and assigns, from and against any and all losses, damages, fines, costs or expenses of any nature, including loss of marketability and attorney s fees and costs, resulting from breach of any representation or warranty, covenant or agreement, made by Originator.

10 Sample Indemnification Agreements Originator shall indemnify the Aggregator and shall hold Buyer, its officer, directors, and shareholders harmless from and against any and all losses, liabilities, penalties, damages, or other harm or injury that the Aggregator may incur or that may be asserted by any person or entity, including reasonable attorneys fees and court costs arising out of: Any misrepresentation made by the Originator in this agreement or any information provided to Aggregator Any breach by the Originator of any of the Originator s representations, warranties, or obligations under this agreement Any act, or failure to act or perform any term, or obligation of the Originator under this Agreement or any of the Contract Documents; Any failure of Originator to comply with any applicable requirement.

11 Questions? Lauren Campisi McGlinchey Stafford PLLC (504)