Banks Forced to Repurchase Bad Bubble Loans

Banks are being forced to buy back the bad loans they originated and packaged into securities.

Irvine Home Address … 7 FOXCHASE Irvine, CA 92618

Resale Home Price …… $800,000

You took my money, you got my honey

Don't want me to see what you doing to me

I can get back, I gotta deal with you

hey! Gotta gotta pay back


I'm mad!

Got to get back!

Need some get back

Pay Back!

There it tis



James Brown — Payback

Investors are suing banks to get some of their money back from the bad loans banks originated and investors purchased. IMO, the only real beneficiaries will be the attorneys.

Banks Pressed on Sour Home Loans

Investors in Pool of Securities Seek to Force Lenders to Buy Back or Modify Problem Mortgages

By CARRICK MOLLENKAMP — September 23, 2010

Big U.S. banks are facing legal pressure to make up for losses tied to pools of soured low-end mortgage loans.

In the latest effort, a group of investors in 2,300 mortgage securities worth roughly $500 billion is seeking to force several banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them.

I wonder who they are filing suit against. One of the brilliant aspects of subprime was that the major commercial banks and investment banks kept these operations at arms length as separate corporations. Once these corporations imploded, there was nowhere for investors to turn to get their money back. New Century Financial has guranteed billions on loans, but kept almost no capital in the company to cover them. This was common among subprime lenders. Their guarantee didn't mean much if they didn't have any capital to back it.

The move follows other similar efforts. Bond and mortgage insurers, hard hit in the housing crisis, have filed lawsuits accusing lenders and banks of sticking them with flawed loans marred by poor underwriting and faulty appraisals.

Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall Street banks, seeking to force them to buy back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans underpinning securities sold to mortgage giants Fannie Mae and Freddie Mac.

The banks and lenders are fighting these efforts, saying they aren't responsible for the housing crash.

And the outcome is far from certain and could depend on potentially contentious negotiations and litigation that could drag out for years.

Let the attorney feeding frenzy begin. The main parties who will be enriched by all this activity are the attorneys. Investors won't see much of their money, but the attorneys for both sides of these suits will make fortunes.

In any case, analysts say the efforts could force banks to disclose difficult-to-obtain information about the loans, such as how poorly they might have been originated or are being managed.

That data could be used to force banks to repurchase as much as $133 billion in souring home loans, according to Compass Point Research & Trading, a Washington, D.C., boutique investment bank.

The legal efforts focus on the contractual duties of lenders known as "representations and warranties," which can at times require them to repurchase loans or modify them so borrowers can keep paying monthly mortgage bills, which maintains value for mortgage securities tied to the loans.

One of the reasons loan modification programs have been difficult to implement is due to the huge number of loans placed into asset-backed securities and sold into collateralized debt obligations. The terms of these CDOs vary considerably, and many of them have no mechanism to modify loans because nobody anticipated the need.

The Trustees' Roles

At issue are the roles of trustees and loan servicers. Trustees are little-known administrators inside banks responsible for overseeing loan pools, or securitizations, on behalf of investors. Loan servicers handle day-to-day management of loans, including deciding how and whether to modify the terms of a loan. Both are charged with oversight of pools that hold thousands of loans.

If a trustee, for example, discovers that a borrower lied when getting a loan, the trustee or loan servicer is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by loan originators when they sell loans to a trust, and oversee loan-servicing firms.


But some loan-servicing units reside inside the same banks that originated or underwrote the loans or securities. This sets up a potential conflict of interest because a loan-servicing arm would have to force another department or affiliate inside a bank to take back a problem loan.

I recently reported on the GSEs efforts to force servicers to process loans. The large commercial banks in particular have billions of dollars in second mortgages on their books, so they are delaying foreclosure as long as possible to try to obtain some value from their worthless second mortgages. This glaring conflict of interest has not gone unnoticed.

In a letter to the trust departments of several large banks, Talcott Franklin, a Dallas lawyer representing the investors holding 2,300 mortgage bonds, claims the loan-servicing units too infrequently modify poor-performing home loans underpinning mortgage securities or replace them with better loans.

"This is of great concern to the pension funds, bank and credit-union depositors, mutual fund holders, 401(k) holders, endowments, state and local governments and taxpayers who depend on the performance of these investments," the letter says.

U.S. Bancorp, Bank of America Corp., Bank of New York Mellon Corp., and Wells Fargo & Co. received the letter from Mr. Franklin, while Deutsche Bank AG didn't, according to people familiar with the situation. The banks either declined to comment or didn't return requests for comment on the letter.

In a statement, a spokeswoman for Wells Fargo said the bank has "an established track record of responding to all legitimate verified bondholder inquiries in a timely manner."

All the major banks are delaying foreclosure for their own selfish needs. The holders of the first mortgages are still in denial, and the servicers who hold the second mortgage are in no hurry to bring reality to the situation.

A key first step in the legal fights is obtaining the loan files that will detail how the loans were originated and what is being done now to salvage investors' money.

If the investor maneuver is successful in getting the loan information, "this will lead to similar actions taken by a larger set of bondholders," said Chris Gamaitoni, a Compass Point senior analyst. "We believe that once loan files are acquired, that the breaches of reps and warranties will be relatively clear."

In an Aug. 17 report, Compass Point said the litigation makes common claims: "A significant portion of the underlying loans failed to comply with the underwriting guidelines or other reps and warranties, and thus misrepresentations and material omissions were made in connection with the sale of" residential mortgage-bond securities.

Actually, I don't think they will find many of the underlying loans failed to meet the guidelines. There were no guidelines. Often the guidelines that were in place were so ridiculous that the investors deserved to lose money. Many of these CDOs stated on the first page the kind of crap that was inside them.

In recent weeks, some of the banks have begun early-stage talks with Mr. Franklin to provide data about the loans underpinning the securities, such as loan documents and how the loan has been serviced. Separately, Mr. Franklin hopes to persuade the trustees to take increased steps to deal with souring loans, such as forcing loan sellers to repurchase the loans or requiring loan servicers to improve loan servicing.

In the past, complaints by mortgage-security investors went unheeded. But because Mr. Franklin now represents enough investors to meet certain legal thresholds—he, for example, represents 50% or more of the voting rights of 900 mortgage securities—his clients could fire a trustee, demand changes in the way a mortgage bond is managed or ultimately file a suit on behalf of a huge group of bondholders.

In the letter, Mr. Franklin said that in some trusts where the lender and servicer sit inside the same bank, the number of recent repurchases by the lender is zero, even though the default rate for the loan pool is 25%.

Do you think the conflict of interest is causing problems? I think it is obvious.

'That's Just Not Right'

Some investors "had no idea that their money was being invested in mortgage-backed securities," said Mr. Franklin. "And yet somehow these people are now the ones being punished, and that's just not right."

If the investors had no idea their money was being invested in MBS pools, then those investors were idiots. Accredited and institutional investors don't have many rights of recourse against a properly administered investment that goes bad. Big investors are supposed to know what they are buying, and ignorance to the nature of the investment that has been properly disclosed does not give them cause of action.

To keep track of the securities his clients own and protect his clients' confidential holdings, Mr. Franklin uses a software system he designed with a college friend, who consults on how to design large databases. Mr. Franklin calls it the "Tranche" program, a reference to the French word for slice or layer. Mortgage securities are chopped into tranches based on risk and return.

His clients' information is coded and Mr. Franklin keeps a secret code book as a reference. Mr. Franklin said the system is important because it lets him know when his clients in a specific deal have amassed enough voting power.

In the other cases, bond insurer MBIA Inc. sued Credit Suisse Group in New York state court in December over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.

In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc., sued a Credit Suisse unit in New York state court, alleging that it made "false and misleading" representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.

A Credit Suisse spokesman said the claims are without merit and the bank will defend itself against the claims.

Since Credit Suisse had people like Ivy Zelman consulting for them (she originated the ARM reset chart), it seems likely that Credit Suisse properly disclosed the risks.

Separately, American International Group Inc. is analyzing mortgage deals it insured before it imploded in 2008. Chief Executive Robert Benmosche told investors in May that the company will take "appropriate action" if it finds it was harmed by the transactions.

Write to Carrick Mollenkamp at

No hurry. It's empty

When a property is sitting empty in a nice neighborhood, the banks have been in no hurry to foreclose. Today's featured property might as well be an REO. I don't know how they plan on getting the owners to negotiate a short sale when they aren't there anymore, but title is still in the name of the former residents, and this property is listed as a short sale. Realistically, this listing exists to get bids so the banks can determine market value so they can make a determination on a bid at auction. This property will almost certainly go to auction.

  • The property was purchased for $487,000 on 3/4/1999. The owners used a $389,300 first mortgage and a $97,700 down payment.
  • On 5/18/1999, they obtained a $41,000 second mortgage.
  • On 2/13/2001 they opened a $100,000 HELOC.
  • On 3/1/2002 they refinanced the first mortgage for $525,000.
  • On 11/1/2002 they obtained a stand-alone second for $50,000.
  • On 4/25/2003 they refinanced with a $535,000 first mortgage.
  • On 5/28/2004 they refinanced again with a $652,000 first mortgage.
  • On 4/29/2005 they obtained a $100,000 HELOC.
  • On 1/2/2007 they refinanced the first mortgage for $900,000.
  • Total mortgage equity withdrawal is $510,700. They are part of the elite equity-stripping HELOC abusers: the half million dollar club.
  • Total squatting time is about 198 months.

Foreclosure Record

Recording Date: 03/16/2010

Foreclosure Record

Recording Date: 08/31/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/26/2009

Document Type: Notice of Default

Will this happen again?

What do you think? Will people get the chance to strip $500,000 out of their walls again in the future?

Irvine Home Address … 7 FOXCHASE Irvine, CA 92618

Resale Home Price … $800,000

Home Purchase Price … $487,000

Home Purchase Date …. 3/4/1999

Net Gain (Loss) ………. $265,000

Percent Change ………. 54.4%

Annual Appreciation … 4.2%

Cost of Ownership


$800,000 ………. Asking Price

$160,000 ………. 20% Down Conventional

4.31% …………… Mortgage Interest Rate

$640,000 ………. 30-Year Mortgage

$152,884 ………. Income Requirement

$3,171 ………. Monthly Mortgage Payment

$693 ………. Property Tax

$250 ………. Special Taxes and Levies (Mello Roos)

$67 ………. Homeowners Insurance

$113 ………. Homeowners Association Fees


$4,294 ………. Monthly Cash Outlays

-$748 ………. Tax Savings (% of Interest and Property Tax)

-$872 ………. Equity Hidden in Payment

$250 ………. Lost Income to Down Payment (net of taxes)

$100 ………. Maintenance and Replacement Reserves


$3,023 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$8,000 ………. Furnishing and Move In @1%

$8,000 ………. Closing Costs @1%

$6,400 ………… Interest Points @1% of Loan

$160,000 ………. Down Payment


$182,400 ………. Total Cash Costs

$46,300 ………… Emergency Cash Reserves


$228,700 ………. Total Savings Needed

Property Details for 7 FOXCHASE Irvine, CA 92618


Beds: 4

Baths: 2 full 1 part baths

Home size: 3,238 sq ft

($247 / sq ft)

Lot Size: 4,431 sq ft

Year Built: 1998

Days on Market: 17

Listing Updated: 40431

MLS Number: L34073

Property Type: Single Family, Residential

Community: Oak Creek

Tract: Ashp


According to the listing agent, this listing may be a pre-foreclosure or short sale.

Beautiful 2 story home with 4 bedrooms and 3 baths.Corian counters in spacious Kitchen, Master Bath, and 1/2 bath. Custom closet in Master Bath. Wired for surround sound in Dining rm, Family room, outside and Master Bedroom. Wood Flooring downstairs and tile in upstairs bathrooms, laundry rm too. Epoxy garage floors. Schools, Oak Creek Elementary, Lakeside Middle School, Woodbridge High.This won't last, make an offer!

28 thoughts on “Banks Forced to Repurchase Bad Bubble Loans

  1. winstongator

    From when the owners took on the $390k loan, to when they got the $900k loan, did their income go up 130%? The 0.7% lower rates don’t nearly make up that difference. Did they take on an ‘affordability’ product (rhetorical question)?

    It is possible that their income went up by that much, but from what I saw in FL, people cranked up the DTI, and the interest-only/pay-option products. I doubt if they worked in tech that they saw significant income increases from the bubbly 99 to 07, but if they worked in RE/banking it wouldn’t have been hard. But is it a great idea to use business cycle dependent income to qualify a 30 year product?

    They’ll get another chance, if they end up in another bubble market.

    1. HydroCabron

      From when the owners took on the $390k loan, to when they got the $900k loan, did their income go up 130%?

      Probably not, but they did earn – cough, cough – an extra $50K per year in tax-free HELOC money, good at the Mercedes dealership, cruise line office, and any other bank, so they’re technically high earners.

    1. HydroCabron

      Skepticism on the figure of 198 months is warranted.

      I wonder how many non-paying homeowners have broken the 48-month squatting barrier? A year ago – perhaps in the comments to this blog – I saw mention of the existence of 3-year squatters, with the source claimed to be a BofA loan officer.

      I’d actually be proud to meet someone who has pulled off a four-year squat.

      1. flyovercountry

        I’m assuming IR meant 198 days… Mid February 2009 to end of August 2009, instead of 198 months, which would have been 16.5 years ago… But in California, nothing would shock me.

  2. irvine_home_owner

    There are several Ashford Place homes up for sale in Oak Creek right now, three on Foxchase alone.

    This one doesn’t have the 3rd car garage but it does have a 3rd floor (despite the erroneous listing description).

    Will these get into the mid $700ks? I may bite if that happens.

    1. Sue in Irvine

      I actually like the outside look of this house. I’ve never seen this part of Oak Creek. What’s on the 3rd floor? I see those 2 dormer windows. Is it just an attic?

      1. irvine_home_owner

        Ashford Place had the option for a 3rd floor space (much like similar plans in West Irvine). I think it’s just a bonus room although I think there was an option for bath/room combo.

        I always wondered why they built Oak Creek the way they did… they should have put these bigger homes on the interior away from the freeway.

        Is there an issue with putting the park/school next to the freeway soundwall and building in from there?

        1. FreedomCM

          Is there an issue with putting the park/school next to the freeway soundwall and building in from there?

          other than poisoning the children 8 hours/day?

          1. irvine_home_owner

            1. Hopefully children aren’t in school 8 hours per day.

            2. Interior air filters for a school should be better than a home.

            3. Grass and trees probably help with air quality more than rows of homes.

            4. Doesn’t have to be the school… putting the park there would be just fine as a natural noise buffer (and there are many parks right next to freeways… even in Irvine).

            Sometimes I wonder how master planned Irvine is… some of the things they are doing just doesn’t make sense and to change it would be nominal in cost and execution.

          2. rkp

            this house is ~420 feet from the 405! i lived in an villa coronado, IAC rental, and ours was the furthest possible unit at about 800 feet and the noise was still heard in our unit will windows closed. i know i am more sensitive than most but this house is in a terrible location. would be better if they planted tons of tall trees on the 405 side of the wall instead of leaving it open…

          3. Swiller

            It’s good that you question the “master planned” community of Irvine. I’ll save you the hassle of going to Wiki.

            “William Pereira, the University’s consulting architect, and The Irvine Company planners drew up master plans for a city of 50,000 people surrounding the new university. The plan called for industrial, residential and recreational areas, commercial centers and greenbelts. The new community was to be named Irvine; the old agricultural town of Irvine, where the railroad station and post office were located, was renamed East Irvine.[2] The villages of Turtle Rock, University Park, Culverdale, the Ranch and Walnut were completed by 1970.

            On December 28, 1971, the residents of these communities voted to incorporate a substantially larger city than the one envisioned by the Pereira plan. By January 1999, Irvine had a population of 134,000 and a total area of 43 square miles.”

            Designed for approx. 50,000, now home to what, almost 300,000?

        2. irsx02

          The 3rd floor is a giant bonus room. It expands from one end of the house to the other. Its nice, even has its own separate A/C unit. I don’t remember the option for a bath/room combo though.

      2. toshi

        Personally, I think this house is sort of humdrum. The only thing it has going for it is its size, but large homes aren’t as desirable as they were in the bubble years.

    2. tenmagnet

      At $247/ft. this isn’t bad for 3,238sq.ft.
      The interior could use some cosmetic updating.
      Changing the color on the kitchen walls.
      Agree, the exterior looks nice.

      1. irvine_home_owner

        By the pictures, it looks like they removed all the kitchen appliances. Makes me wonder what else is missing or damaged.

        1. tenmagnet

          Yeah, I noticed that as well.
          At that price point it makes sense to add all new appliances and fixtures.

  3. Geotpf

    In 1977, my mom had a refrigerator that was the same color as the color of the kitchen walls of that house.

  4. Perspective

    “…The main parties who will be enriched by all this activity are the attorneys…”

    I’ve read that Lehman Bros (the remains that are being dissolved) has spent $900B to date trying to unwind their positions and payback creditors. Some of this is to finance experts to figure-out Lehman’s positions, but the vast majority is to legal counsel.

  5. rkp

    IR-why do the owners have to still live in the house for the short sale to be approved? I don’t understand why you think this will definitely go to auction.

  6. Lawyer

    People should become part of class action lawsuits against the banks and financials. They must be made to pay. They will pay my profession and also the victims of their wrong doing.

Comments are closed.