ResCap suing brokers who originated bad mortgage loans
A division of ResCap, the embattled mortgage-finance arm of GMAC Financial Services, is fighting back in the home-lending credit crisis.
The Bloomington-based investor has filed more than a dozen federal lawsuits in Minnesota against mortgage companies, claiming that they failed to do adequate due diligence on borrowers and provided inaccurate information about the financial wherewithal of loan applicants.
ResCap, through its Residential Funding Co. unit, is seeking millions of dollars for nonperforming loans that it financed from mortgage brokers around the nation.
Securities and real estate experts expect more lawsuits to come as the finger-pointing among lenders, brokers and investors gets ugly.
“Was it the brokers who didn’t do the due diligence? Was it the lenders who didn’t investigate? Was it those that pooled the loans as investment securities? Whose fault is it?” asked Eileen Roberts, who teaches real estate law at William Mitchell College of Law. “It was greed,” she said. “Nobody believed the housing bubble would ever burst.”
A survey by Navigant Consulting of subprime-related lawsuits found an explosion of cases in 2007 that shows no sign of abating in 2008. Looking only at federal court filings, the Chicago-based consulting firm said 170 cases were filed in the first three months of 2008, nearly the same number filed in the last six months of 2007.
In its lawsuits, ResCap alleges that individual mortgage and finance companies made misrepresentations concerning borrowers’ employment, income, occupancy and other “undisclosed liabilities.”
ResCap asserts that the mortgage originators are contractually obligated to buy back those troubled loans because they had been sold to ResCap on the belief that they were of “investment quality, had been prudently originated and had been properly underwritten.”
The loans at issue range from $21,000 to more than $1 million.
ResCap declined to comment for this report.
ResCap, the seventh-largest originator of residential mortgages, has been ailing for more than a year. Last week, parent GMAC reported that ResCap lost nearly $1.9 billion in the second quarter of 2008, compared with a second-quarter loss of $254 million a year ago.
Worse in other states
The mortgage crisis in Minnesota is not as bad as in states such as California and Florida or in fast-growing Sun Belt cities such as Las Vegas, where housing values have plunged. Still, the Twin Cities has not been immune from widespread foreclosures. According to Foresight Analytics, a California-based real estate consultant and analyst, the Twin Cities ranked 17th in foreclosure rate among the 100 largest U.S. metropolitan areas.
Minnesota attorneys who practice in real estate law have watched the rise in litigation over the past year and are not surprised by it.
“It was unusual to see these kinds of lawsuits in the past, but now they’re becoming much more common,” said John Koneck of Fredrikson & Byron. “It’s the number of foreclosures and the discovery of [lending] abuses.”
Koneck said lenders typically first pursue the borrower when a loan is in default and then discover that the mortgage was approved on less-than-perfect information from the applicant. Now, lenders are turning their attention to the mortgage brokerages, he said.
ResCap originates loans and also is known as a warehouse lender that provides financing to mortgage companies and issues mortgage-backed securities to investors.
ResCap has filed 13 lawsuits against mortgage companies in federal court in Minneapolis just this year, up from a handful in previous years.
“Lenders are saying to brokers: ‘I relied on you guys to get good information on these borrowers,’” said Jim Langdon, a securities attorney for Dorsey & Whitney. “It’s like the big fish eating the smaller fish.”
The real estate mortgage crisis began to accelerate as adjustable rate mortgages began to reset higher, often becoming too expensive for homeowners who already were stretched thin financially. As homes went into foreclosure, values slumped, causing a new round of headaches for other mortgage borrowers.
“I’m reluctant to say all the blame is on the lenders, said Brent Lindahl, a member of the mortgage banking group for the Twin Cities law firm of Briggs and Morgan. “Borrowers were all too willing to take the money when it was available. Everyone thought the price of housing would continue to go up, and that wasn’t the case, and that turned out to be a problem.”
The prospect of litigation in the mortgage market prompted Eden Prairie-based Kroll Ontrack to survey the attitudes of potential jurors to the home-lending crisis. Lenders may not like the results. Nine out of 10 who were surveyed said they believe that lenders who issued subprime loans took risks and ignored more-prudent lending practices.
“There aren’t too many people who have a positive view of the lending community,” said Robert Minick, trial consultant with Kroll Ontrack’s TrialGraphix division. “From the mortgage/lender point of view, it’s a very frightening situation,” he added. “It’s going to be expensive.”
David Phelps • 612-673-7269
© 2008 Star Tribune. All rights reserved.
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