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Mortgage Loan Repurchase Claims: Not That Different from Other Contract Claims

Philip R. Stein & Robert M. Siegel

Aggregator Banks and Repurchase or Make Whole Claims

As most correspondents/originators are now painfully aware, aggregator banks are unleashing a barrage of “repurchase” or “make whole” claims related to loans sold by the correspondent years ago. The aggregators cite supposed loan level breaches of representations and warranties in the applicable mortgage purchase and sale agreement or in the correspondent/originator guidelines.

These aggregators invariably maintain that they have somehow “verified” the alleged breach, acting in their self-appointed capacities as “judge, jury and executioner.” The aggregator then identifies the amount that it is demanding, revealed in its internally generated billing statement, and that amount is portrayed by the aggregator as rock-solid and carefully calibrated.

Correspondents and Circumstantial Evidence

By now we would hope that correspondents are well aware that these typical loan level claims consist largely, if not exclusively, of circumstantial, inconclusive, inconsistent and/or opinion-based “evidence,” usually obtained years after the fact. But, leaving aside these typically weak loan level claims, there are far more fundamental issues that we believe are often overlooked in assessing the merits of an aggregator’s claim, including one discussed below.

Consider the essential premises of a demand for “repurchase” or “make whole” with regard to a loan. Those premises are that the aggregator making the demand has suffered a loss and has in its possession an active, viable loan available for repurchase (on a repurchase claim), or that, in a make-whole claim, it at least suffered some definite loss for which it wants to be compensated.

Yet demand letters typically do not state that the aggregator has actually already incurred an out of pocket loss, either because it actually had to pay its investor a repurchase price for the loan or make the investor whole.

When one considers that aggregators were generally not acquiring loans from correspondents to hold them in the aggregator’s portfolio, but instead were re-selling these loans soon after acquiring them and doing so at a profit, the vital importance of determining whether the aggregator subsequently even re-acquired the loan at all becomes crystal clear.

Of course, even if it did, all sorts of other questions must be analyzed and resolved in the aggregator’s favor before a correspondent should even think about making a payment.

Mortgage Backed Securities Related Lawsuits

Bank of America recently told FNMA that it was unwilling to repurchase loans from it, and is also refusing to buy back loans from its other investors, giving rise to MBS-related lawsuits, for example.

Just the other day, JPM Chase’s Chairman, Jamie Dimon, vowed to “fight repurchase claims that pretend the steep decline in home prices and unprecedented market conditions had no impact on loan performance.”

That would appear to encompass virtually all of the loans made during the housing boom. Mr. Dimon further stated he would refuse to pay “securities claims brought by sophisticated investors who understood and accepted the risks.” We commend Chase for taking such a strong stand against repurchases. Indeed, we must also credit it with being one of the most highly sophisticated investors in the world.

Lethal Implications

But the implications of that status are lethal to Chase’s own repurchase claims made on correspondents, and Bank of America likewise cannot legitimately refuse to re-acquire (and refuse to pay “damages” allegedly related to) huge categories of loans but nevertheless seek to force correspondents to pay Bank of America for loans it does not own and will not re-acquire.

Or do the Too Big to Fail (TBTF) banks get a free pass when it comes to talking out of both sides of their mouths?

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