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Plaintiff’s Perspective: Litigation and Liability in the Secondary Market

Plaintiff’s Perspective: Litigation and Liability in the Secondary Market. Law Seminars International New York City March 19, 2008 Brad Blower Relman & Dane 1225 19th Street NW, Suite 600 Washington, DC 20036 (202) 728-1888 (202) 728-0848 (fax) bblower @relmanlaw.com www.relmanlaw.com.

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Plaintiff’s Perspective: Litigation and Liability in the Secondary Market

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  1. Plaintiff’s Perspective: Litigation and Liability in the Secondary Market Law Seminars International New York City March 19, 2008 Brad Blower Relman & Dane 1225 19th Street NW, Suite 600 Washington, DC 20036 (202) 728-1888 (202) 728-0848 (fax) bblower@relmanlaw.com www.relmanlaw.com

  2. Projected Economic Costs of the Subprime Mortgage CrisisState-by-State Source: Senate Joint Economic Report (Dec. 2007)

  3. Secondary Market Fallout from Subprime Meltdown • Cities seeking redress for injury caused by foreclosures • State unfair and deceptive practices claims related to origination and marketing of “risky” loans • State and federal securities fraud investigations • Class actions challenging investors’ ability to foreclose • Public interest group redlining cases

  4. Reasons for Fallout • Failure to Adequately Assess Risk • Failure to Properly Underwrite to Maintain Volume and Profits • Failure to Support Loss Mitigation, Including Permanent Loan Modifications • Failure to Provide Full Access to Credit to Protected Groups

  5. Lesson Not Learned • In re First Alliance Mortgage Company, 471 F.3d 977 (9th Cir. Dec. 8, 2006) • Upholds jury verdict that Lehman Brothers aided and abetted First Alliance fraud on Consumers • Jury verdict in 2003

  6. Race to the Bottom • Attorney Generals – Foreclosure Prevention Working Group • 2005-2007 – “lax underwriting standards prevailed and long-standing lending norms were routinely ignored” • Clayton Group data • 30% of loans purchased did not meet lenders’ underwriting standards • Fitch • “poor underwriting quality and fraud” may account for as much as 25% of the defaults

  7. The Result - Litigation

  8. Theories of Liability • Fair Housing Act • Public Nuisance • Unfair and Deceptive Practices • Securities Violations

  9. Fair Housing Act (FHA) • Courts have consistently found that both redlining and reverse redlining violates the Fair Housing Act.* • Section 3604 - “otherwise make unavailable or deny, a dwelling to any person because of race…” • Section 3605(a) – “any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person . . . in the terms or conditions of such a transaction, because of race . . . .” * See e.g., Hargraves v. Capital City Mortgage Corp., 140 F. Supp. 2d 7 (D.D.C. 2000); Barkley v. Olympia Mortgage Co., 2007 WL 2437810 (August 22, 2007)

  10. FHA Theories of Liability • Disparate Treatment • Restrictions intentionally make housing unavailable • Disparate Impact • Implementing facially neutral policies has disproportionate impact

  11. Fair Housing Act (FHA) Fair Housing Act applies to Secondary Market • “Otherwise make unavailable” applied by courts and HUD very broadly to insurance, appraisals and other financial services related to housing • Section 3605(b) – defines real estate transactions as the “making or purchasing of loans”

  12. FHA Application to Entire Lending Process • Barkley v. Olympia Mortgage, 2007 WL 2437810 (E.D.N.Y. Aug 22, 2007) • AARP case on behalf of eight African-American borrowers • Sued developer, lenders, appraisers and lawyers • Asserts defendants violated Fair Housing Act and Civil Rights Act • Borrowers “duped” into buying overvalued homes with predatory loans • Court denies motion to dismiss finding that plaintiffs have stated a case of reverse redlining, civil rights violations, fraud and negligence • Court accepted that claims not time barred because plaintiffs plead a continuing violation

  13. Public Nuisance • Public Nuisance • Can seek remedy for injuries by a product if “design, manufacturing, marketing or sale of the product unreasonable interferes with a right common to the general public.” • City’s allegation that manufacturer controls “the creation and supply of this illegal, secondary market for firearms….” sufficient to survive motion to dismiss. City of Cincinnati v. Beretta U.S.A. Corp., 768 N.E.2d 1136 (Ohio 2002)

  14. Unfair and Deceptive Practice • Unfair and Deceptive • Remedy for injuries to public caused by “risky loan products” that company “should have known were designed to fail” • Injury also caused by unfair or deceptive loan servicing which lead to unnecessary foreclosures Commonwealth of Massachusetts v. Fremont Mortgage (October 5, 2007)

  15. Cases by Municipalities • Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc. (D. Md. January 8, 2008) • Reverse redlining case under Fair Housing Act • Alleges Wells Fargo targeted bad loans to African Americans that resulted in foreclosures which injured Baltimore • Cleveland v. Deutsche Bank Trust Company et al. (Ct. Common Pleas January 11, 2008) • Public nuisance case under Ohio common law • Alleges that 21 lenders and investment banks funded bad loans that resulted in foreclosures that injured Cleveland by creating a public nuisance

  16. State Cases • Commonwealth of Massachusetts v. Fremont Mortgage (Suffolk Superior October 5, 2007) • Marketing of “risky loans” including 100% piggyback loans • ARM loans where the borrower cannot afford the reset • Stated income, No-Doc and Low-Doc loans • In the matter of: Merrill Lynch, Pierce, Fenner & Smith Inc. et al. (Office of the Secretary of the Commonwealth February 1, 2008) • Selling Collateral Debt Obligations to City of Springfield backed by subprime mortgages • Violated state securities law by misleading, recommending unsuitable products, failing to get permission to purchase and failing to disclose information

  17. Recent Federal and State Securities Investigations • Morgan Stanley, Goldman Sachs and Bear Stearns acknowledge in annual reports that have received requests for information from various government agencies. • FBI and SEC investigations of originators’ and secondary market’s role in subprime meltdown. • New York State Attorney General investigating Wall Street packaging and selling of mortgage-backed securities. Clayton Group cooperating in investigation.

  18. Foreclosure Prevention Class Actions • Whitaker et al. v. Deutsche Bank National Trust Co. (N.D. Ohio February 7, 2008) • Investor does not have proper title to foreclose • Foreclosures violated Fair Debt Collection Practices Act and Ohio RICO by using false and misleading statements • Jackson v. Mortgage Elec. Registration Systems, Inc. (D. Minn. February 13, 2008) • MERS violated Minnesota law by foreclosing without listing assignees in notice • Court denied motion for temporary restraining order. Case continues on underlying merits.

  19. Public Interest Redlining Case • NCRC v. Saxon Mortgage, Inc. et al. (HUD November 26, 2007) • Mortgage company and parent Morgan Stanley violated FHA by underwriting guidelines which limit loans on Indian reservations, in Puerto Rico, Guam and U.S. Virgin Islands

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