On Wednesday, the bond insurer
Syncora filed its latest brief in its three-year-old
litigation with Countrywide over $6 billion in Syncora-insured securities
backed by Countrywide mortgages. Like its fellow bond insurer MBIA, Syncora was
quick to assert claims that Countrywide breached the representations and
warranties it made about underlying mortgage loans. Syncora’s lawyers at Debevoise
& Plimpton sued
Countrywide way back in 2009. Since then, according to a Sept.
16 Countrywide brief, Bank of America has spent millions of dollars
locating, processing, and producing documents to Syncora. In the first round of
discovery, the bank produced 18 million pages on the 114,000 loans underlying
the five offerings at issue in the case. After New York
Nevertheless, Countrywide and
Syncora have only just begun their fight over missing documents in the loan
files. Rememer, this particular fight isn’t about what the scores of pages in
each loan file say about the underwriting on each individual underlying
mortgage. This is a fight simply over missing pages. Countrywide and Syncora
engaged in full-on briefing and oral argument over which side bears
responsibility for identifying the missing documents. Then, after the judge
said complete
document production was
Countrywide’s problem and Countrywide found a batch of documents that
supposedly filled loan file gaps, Syncora protested that the discovery came too
late.
Countrywide believes that
Syncora intends to argue that any missing document amounts to a breach of
Countrywide’s reps and warranties. Syncora’s response, filed Wednesday, is
unfortunately sealed, although Syncora’s final summary judgment brief isn’t.
Syncora has asked Judge Bransten for a declaratory judgment that it doesn’t
have to show reps and warranties breaches were responsible for defaults on
underlying mortgage loans in order to demand Countrywide buy back the deficient
loans. That low standard would make the pending issue of whether a mere missing
document amounts to a breach all the more important.
To understand why it’s so hard
to assemble the underlying loan files, I talked Thursday to the head of
mortgage operations at a company that evaluates mortgage loans for both banks
and MBS plaintiffs in connection with reps and warranties claims. Typically, he
said, his company receives pdf or tif images, either directly from a bank or
mortgage originator or from a plaintiff’s discovery. Through at least five
successive rounds of review, his teams log what’s in the files-which average
200-220 pages-and identify what’s missing. “It’s a mess out there,” he said,
explaining that at the height of the housing boom, mortgage originators were simultaneously
writing loans as fast as they could and switching from paper to electronic
recordkeeping. Sometimes the loan files are incomplete because lenders didn’t
conduct adequate underwriting, he said. More often they’re incomplete because
of paperwork snafus.
Documents are missing from
about one-third of the loan files his teams have reviewed. Typically, his
company contacts mortgage lenders to ask them to search for the specific
missing information, and usually, he said, the banks find it once they know
what they’re looking for. Only when his company has done all it can to put
together the missing pieces does he check for errors in the files. And then, he
said, his group has found an average error rate of 60 percent.
I asked whether it was fair for
plaintiffs to foot the bill when his company calls mortgage lenders to ask
about missing documents. He agreed that it’s not, that banks should be
searching for files on their own. “We shouldn’t be doing their job for them,”
he said. “Plaintiffs shouldn’t be paying for it.”
Let’s step back for a second,
though, to think about the implications of the sort of effort his company pours
into assembling and reviewing individual loan files. Syncora’s Countrywide case
is relatively small by MBS standards, and the judge overseeing it has approved
sampling. There are still 2,000 loan files (comprising at least a dozen
documents and scores of pages) at issue. Extend that sampling rate across
pending reps and warranties claims, and assume that both sides in each case are
doing the sort of re-review my mortgage friend describes. They have to:
Depending on how Judge Bransten rules in the Syncora and equally ripe MBIA
cases against Countrywide, banks could end up liable for every loan file that’s
missing a document.
Now imagine that Bank of
America’s proposed $8.5 billion reps and warranties settlement falls through.
And imagine that, as I’ve
predicted, securitization trustees and MBS investors step up their
breach of contract demands. We’re looking at breathtaking legal fees and costs.
If you’re a lawyer working on either side of the MBS litigation or a business
specializing in re-underwriting mortgage loan files, maybe that’s a good thing.
But if you’re just someone
wondering how the economy can recover with MBS liability looming overhead, it’s
definitely not.
