Banking Law

G-Mac Steps Up Its "Regifting" Of Bad Loans

Freddie and Fannie aren't the only big loan investors who have been issuing massive loan "put backs" to their loan sellers. They've recently been joined by GMAC's Residential Funding Co., which, according to the Minneapolis/St. Paul Business Journal, "has nearly tripled the number of lawsuits it?s filing against mortgage lenders that saddle it with undesirable loans."

RFC brought about 20 suits in 2008 against lenders for not buying back so-called nonconforming mortgages they had sold to RFC. The company requires such buybacks when loans fall below a certain level of investment quality. In 2007, RFC brought about a half-dozen such suits, according to federal and Minnesota district court records.

While most of the suits appear to settle, a number have gone to trial. In the latter, RFC has won anywhere from a few thousand to a couple of million dollars. More important than the amount of any individual award, however, is likely the fact that the word is out that RFC is on the warpath, and that you'd better treat any buyback demand seriously. If you don't, RFC will "unleash the hounds."

RFC won't admit that it's altered its policies or procedures concerning buybacks.

RFC representatives would not explicitly acknowledge an increase in the number of cases it has brought against mortgage lenders, saying that the company has always filed such suits when they?re warranted.

?You may observe that [trend],? said Jeannine Bruin, director of mortgage communications at GMAC. ?If there were [an increase], it?s not due to a change in the process. There may or may not be a trend, but nothing has changed in our process.?

The Journal observes that until 2007, RFC had not filed more than 6 such lawsuits in any single year. In 2008, the number shot up to 20 from 7 in the previous year. That's what we call a "spike." It may indicate that RFC's uncovered more "put-backable" loans, which is likely. Many of those, perhaps, have been put back to RFC itself by either Fannie or Freddie.

RFC sells some of the securitized mortgages to Fannie Mae and Freddie Mac, which can require RFC to repurchase nonconforming loans as well. Consequently, RFC is not profiting from the judgments it receives, said Don Heeman, RFC?s outside counsel from Minneapolis law firm Felhaber, Larson, Fenlon & Vogt.

?It?s a down-the-stream passing of the money,? Heeman said. ?If there?s a [nonconforming loan] in the securitization pool, the obligation flows to RFC.?

The increasing number of nonconforming loans is directly caused by the housing crisis, Heeman said. ?Let?s face it, the mortgage market is like every other market. It has its peaks and valleys.?

The valley in which it currently finds itself makes the Grand Canyon appear to be a shallow grave, in comparison. This "down-streaming" effect is further proof that crap does, in fact, flow downstream.

A tripling in the number of lawsuits is good news for trial lawyers. Not so good news for the rest of us.

Full post as published by Bank Lawyers Blog on January 27, 2009 (boomark / email).