We have long been skeptical of most loan “repurchase” or “indemnification” demands made by big banks against the third-party originators (i.e., correspondent lenders) who sold those loans to the big banks many years ago. Our skepticism arises not just from a loan-by-loan analysis of the demands being made against our clients (the correspondent lenders). We are also highly skeptical because of all sorts of issues related to what the big banks did with these loans after acquiring them from our clients.
Those issues include all the assurances that the big banks gave their investors about the accuracy of the loan files and high quality of the loans. They also include the long periods of time between (i) when the big banks would have surely discovered a “breach” if one truly existed and (ii) when any such “breaches” were finally called to our clients’ attention. And, as much as anything else, we are also tremendously skeptical about whether the big banks have truly suffered any damage at all related to these loans, and, if so, whether anything our clients or the borrowers did years ago is the true cause of any such damage.
Our long-time skepticism is only increasing now, with news of the latest multi-billion dollar settlement payments made by a group of major banks, this time for mortgage foreclosure and servicing abuses. One of the biggest abuses that led to the demands that led to this settlement was “wrongful foreclosures.” So let’s think this through, to see how it relates to loan repurchase and indemnification demands by these same big banks (Countrywide/Bank of America, Wells Fargo, Chase, Aurora, Citibank, U.S. Bank and SunTrust, among others) against our clients.
The connection is pretty simple — and disturbing. Virtually all buy-back demands come about because a big bank claims to have suffered a “loss” related to the loan, and says that the “loss” came about because of breached representations and warranties made by the correspondent lender at the time the loan was sold. That theory about why the “loss” occurred is pretty dubious to begin with. But what do the banks point to when they talk about the “loss”? Quite often, they are pointing to the fact that the loan had to be foreclosed upon, and the sale of the underlying property did not cover the amount owed on the loan.
Well, now we have further confirmation that loans that were foreclosed upon should not have been — and that this type of abuse, among others, happened so extraordinarily often that the big banks were pretty much compelled to pay out billions to settle the claims being made against them.
So what will the big banks say when they continue to make their repurchase and indemnification demands to the correspondent lenders: “sure, we did not really need to foreclose at all, and doing so was abusive, but pay us back for the so-called losses that we suffered when we committed this abuse”? Probably not.
That level of honesty is not in their best interests. More likely, they will try to persuade our clients, and, if necessary, judges, that how and why the big banks suffered their “losses” is nobody’s business, and just oh-so-irrelevant. They don’t want us to peer behind the curtain at the great and powerful Oz.