Pursuant to the settlement, Morgan will provide pay $58 million to more than 1000 Massachusetts homeowners, $23 million to the Massachusetts Pension Fund for investment losses, and $19.5 million in taxpayer money to the Commonwealth’s General Fund.
As a result of a lengthy investigation, the Attorney General’s Office alleged that Morgan entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers. Morgan provided billions of dollars to subprime lender New Century Mortgage, which alleged used Morgan funds to target lower-income borrowers and to supposedly lure them into loans that "consumers predictably could not afford to pay." The MA AG claimed that the loans often were "unsustainable because of payment shock or poor underwriting," and that "borrowers would have to refinance in the short term or face foreclosure." Some Morgan Stanley investment bankers allegedly referred to New Century as Morgan’s “partner” in the subprime lending business.
In addition to the $102 million in financial compensation, the settlement also requires Morgan to change its business practices going forward and to provide information and materials needed in the Attorney General’s ongoing investigation of the subprime securitization marketplace.
Today’s settlement is the latest in a series of actions brought by the Attorney General’s Office in response to the economic and lending crisis. AG Coakley’s Office has been a national leader in bringing actions on behalf of homeowners and taxpayers against companies relating to their role in the subprime marketplace, including Goldman Sachs, Fremont, and Option One (see our updates, below).
Allegations in the Assurance of Discontinuance (attached) include that Morgan provided warehouse lending to New Century, and after New Century made the loans, Morgan would place the loans into a securitization pool, and then act as the underwriter selling investments backed by the subprime loans in the pool.
As part of this securitization process, Morgan employed third party due diligence providers to review the quality of New Century’s loans. During this review, Morgan allegedly learned:
- New Century allegedly repeatedly violated the Massachusetts Division of Banks’ “borrower best interest” standard when it made subprime loans, and thus made loans that violated Massachusetts law.
- New Century allegedly calculated the Debt to Income (DTI) ratio for borrowers based only on the initial “teaser rate” for the loans, rather than the fully indexed interest rate that would kick in after the teaser period expired. When calculated using the fully indexed rate, almost 40% of the loans failed Morgan’s own internal underwriting standards for whether the borrower could pay them.
- The large majority of New Century loans supposedly failed the basic test of their own underwriting guidelines and could only be approved as “exception” loans, which required the presence of “compensating factors.” Sample reviews by Morgan vendors showed that many of these loans violated the guidelines in several different ways, and about one-third of the randomly sampled loans lacked compensating factors to justify the extension of credit.
- Appraisals used by New Century to value the collateral backing the loans (the homes) allegedly were often significantly different from BPOs that Morgan obtained to check New Century’s figures.
- New Century originated a large number of “stated income loans.” In fact, a Morgan employee allegedly noted that New Century overused stated income loans to the point of abuse.
All of these due diligence discoveries underscored the riskiness and/or uncertainty relating to New Century’s loans and whether borrowers would be able to pay them back. According to the MA AG, it is illegal under Massachusetts law to make loans without reasonably assessing a borrower’s ability to pay the loan according to its terms.
In late 2005 and early 2006, Morgan began rejecting greater numbers of New Century loans as a result of the due diligence findings. After New Century suggested it would shift its business elsewhere, Morgan allegedly began again to include a wider range of New Century loans in its purchase pools. A Morgan Stanley senior banker allegedly purchased loans that Morgan’s own internal due diligence team initially rejected, and Morgan allegedly waived vendor concerns regarding a substantial number of the New Century loans identified as having material problems.
Moreover, as New Century finally spiraled towards bankruptcy, its risky lending practices exposed to the public, Morgan Stanley continued to lend money to the subprime originator even when other banks would no longer provide New Century with cash. During early March 2007, Morgan Stanley provided millions of dollars that the AG claims "New Century used directly to finance a last round of unsustainable predatory loans in Massachusetts."
Throughout 2006 and the first half 2007, Morgan continued to securitize New Century’s predatory subprime loans, and sold investments to two Massachusetts state entities—the Massachusetts Pension Reserves Investment Trust (PRIT) and the Massachusetts Municipal Depository Trust (MMDT). According to the AG, this "led to state funds being used to fuel predatory subprime lending, and to significant losses for PRIT and the MMDT."
Under the terms of today’s settlement, Morgan will make the following payments and conduct reforms:
- Pay $58 Million in principal reduction and related relief to over 1000 Massachusetts subprime borrowers
- $19.5 Million payment to the Commonwealth
- $23.4 Million to PRIT and the MMDT
- $2 Million to non-profit groups throughout the Commonwealth to assist victims of subprime foreclosure
- Not fund unfair subprime loans in Massachusetts
- Make additional disclosures to Massachusetts investors regarding its future subprime securitizations
- Provide documents and information to the Attorney General’s Office in its ongoing review of industry subprime securitization practices.
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com
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Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com
From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Tuesday, May 12, 2009 11:28 AM
To: Ralph T. Wutscher
Subject: FYI: Goldman Settles "Subprime Securitizer" Dispute with MA AG for $50M
Under the settlement, Goldman has agreed to significant principal write-downs to allow Massachusetts homeowners to refinance or sell their homes. For homeowners with loans held by Goldman entities, Goldman has agreed to reduce the principal of first mortgages by up to 25-35% and second mortgages by 50% or more. Borrowers whose first mortgage is significantly delinquent will be required to make a reasonable monthly loan payment while seeking refinancing or until they sell their home. If after six months, a borrower is still unable to find financing or sell his or her home, Goldman will reduce the principal owed on the existing loan to assist the borrower. Additionally, for loans not currently held by Goldman, but which are serviced by Goldman’s affiliated servicing company, Litton Loan Servicing LP, Goldman has agreed to assist qualified borrowers with finding refinancing options and other alternatives to foreclosure.
The Attorney General’s Office states that it began its investigation into the securitization of subprime loans in December 2007, and that it has focused on a variety of industry practices involved in the issuance and securitization of subprime loans to Massachusetts consumers. The MA AG's Office also states that it is investigating whether securitizers may have:
- facilitated the origination of "unfair" loans under Massachusetts law;
- failed to ascertain whether loans purchased from originators complied with the originators' stated underwriting guidelines;
- failed to take sufficient steps to avoid placing problem loans in securitization pools;
- been aware of allegedly unfair or problem loans;
- failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and
- failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.
The Goldman settlement and the Attorney General’s investigation into securitizers reflect the latest aspect of the Office’s comprehensive enforcement approach to combating subprime lending and the foreclosure crisis. This latest inquiry concerns the role of securitizers—those who bundled mortgage loans and sold them as mortgage-backed securities or other investment vehicles.
The Attorney General’s Office has sued Fremont Investment & Loan, as well as Option One and its parent H&R Block, alleging unfair, deceptive and predatory lending practices, and obtained preliminary injunctions against those companies. (See our prior updates below.) The Office also promulgated new consumer protection regulations, effective in January 2008, governing mortgage lenders and brokers.
For a map of Massachusetts illustrating locations of loans covered by this agreement, please see:
http://www.mass.gov/Cago/docs/press/2009_05_11_goldman_map.pdf
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@kahrlwutscherllp.com
http://www.krw-llp.com
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Thursday, December 11, 2008 7:18 PM
To: Ralph T. Wutscher
Subject: FYI: MA Sup Ct Affirms Lower Court's Injunction in AG Litigation Against Fremont
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@krw-llp.com
http://www.krw-llp.com
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Tuesday, December 02, 2008 11:38 AM
To: Ralph T. Wutscher
Subject: FYI: Court Rules in MA AG Litigation Against Option One
The Massachusetts Attorney General brought an action against Option One Mortgage Corporation and its affiliates similar to that which she brought against Fremont (see our updates below). The same court granted the Attorney General's motion for a preliminary injunction in the Option One litigation. A copy of the opinion is attached.
Referencing its earlier Fremont decision, the court held as follows:
In this Court's Fremont Decision, the Court found that it is an unfair act in violation of G. L. c. 93 A, section 2 for lender to issue an adjustable rate home mortgage loan secured by the borrower's principal dwelling that the lender reasonably should expect the borrower would be unable to afford to pay or be able to refinance once the introductory period ends unless the fair market value of the home has increased at the close of the introductory period. In that decision, the Court characterized this as structural unfairness. In this decision, this Court characterizes it as reckless disregard of the risk of foreclosure.
However, in its Option One decision, the court changed the criteria for structural unfairness. Here, the court lowered the introductory rate criterion from 3% to 2%, explaining the revision as follows:
In blunter terms, most mortgage loans that fell into delinquency were so carelessly underwritten that the borrower could not afford them even before the payment shock kicked in. Therefore, this Court will revise the second criterion by including all loans with an introductory or "teaser" rate for the initial period that is at least 2 percent lower than the fully indexed rate, and will eliminate this criterion entirely for all loans with a debt-to-income ratio of 55 percent or above.
The court also lowered the loan-to-value criterion from 100 percent to 97 percent, with the following explanation:
…for all practical purposes, a loan meeting the other three criteria with a loan-to-value ratio of 97 percent will only be able to be refinanced by a loan with a loan-to-value ratio equal to or greater than 100 percent, which will almost certainly not be available to a lender with a 50 percent debt-to-income ratio. Therefore, this Court provides the fourth criterion to require a loan-to-value ratio of 97 percent or a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period.
As with Fremont, the court did not find any evidence of pervasive deception or other wrongdoing on the part of the defendants in the Option One litigation. Nevertheless, it again found that the Attorney General was likely to prevail at trial on the issue of structural unfairness, and consequently, granted the Attorney General's motion for a preliminary injunction. Likewise, the Court's preliminary injunction imposed the same review procedure as in the Fremont decision.
Apparently, the court revised the criteria set forth in the Fremont decision upon being informed that only a very small fraction of loans in dispute would have met all four of the criteria imposed against Fremont. The court felt compelled to change the criteria in order to enjoin the foreclosure of a greater population of loans.
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@krw-llp.com
http://www.krw-llp.com
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Monday, August 04, 2008 7:12 PM
To: Ralph T. Wutscher
Subject: FYI: MA Sup Ct Requests Amicus Briefs in AG vs. Fremont Litigation
Roberts Wutscher, LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Mobile: (312) 493-0874
From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Thursday, May 08, 2008 6:05 PM
To: Ralph T. Wutscher (rwutscher@rw-llp.com)
Subject: FYI: MA App Ct Upholds Prelimin Injunction on Foreclosures of Certain "Presumptively Unfair" Loans
Roberts Wutscher, LLP
10 S. LaSalle Street, Suite 3500
Chicago, Illinois 60603
(312) 551-9320 Direct Dial
(866) 581-9302 Facsimile
(312) 493-0874 Mobile
RWutscher@rw-llp.com
http://www.rw-llp.com
From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Wednesday, February 27, 2008 5:11 PM
To: Ralph T. Wutscher
Subject: FYI: MA Judge Preliminarily Enjoins Foreclosures on Certain "Presumptively Unfair" Loans
- The loan is an adjustable rate mortgages with an introductory period of three years or less:
- The loan has an introductory or “teaser” interest rate that is at least three percent lower than the fully-indexed rate;
- The borrower has a debt-to-income ratio that would have exceeded 50% (not based on stated-income application representations, but upon other evidence of income), calculated using the fully-indexed rate; and
- Fremont extended 100% financing or the loan has a substantial prepayment penalty or penalty that lasts beyond the introductory period.
Under the terms of the injunction, Fremont must provide the Attorney General’s Office with at least a 30-day notice of all foreclosures it intends to initiate for the approximately 2,200 loans that Fremont still owns and services, and allow the Attorney General an opportunity to object to the foreclosure going forward. If Fremont has issued a loan that is considered “presumptively unfair,” and the borrower occupies the property as his or her principal dwelling, the Attorney General has 45-days to object to the foreclosure.
After the notice and objection process, Fremont may only proceed with a foreclosure to which the Attorney General objects if Fremont files a request with the Court, and the Court reviews the matter and agrees that a foreclose is appropriate. In considering whether to allow the foreclosure, the court will consider, among other factors, whether the loan is unfair and whether Fremont has taken reasonable steps to work out the loan and avoid foreclosure. The preliminary injunction does not release borrowers from their monthly mortgage obligations.
Importantly, the court stated that the evidence showed that Fremont was the victim of misrepresentations on stated-income loan applications, and did not encourage or tolerate such misrepresentations. Specifically, there was no evidence that: (1) Fremont knew of any of the alleged misrepresentations of income on the 50 or 60 stated-income loans at issue; or (2) Fremont recklessly supervised its brokers by continuing to do business with them after Fremont learned that the brokers had a pattern or practice of inflating the borrower's income on loan applications. Likewise, the court also found no evidence that Fremont had ever misrepresented the terms of the loan to any borrower.
Roberts Wutscher, LLP
10 S. LaSalle Street, Suite 3500
Chicago, Illinois 60603
(312) 551-9320 Direct Dial
(866) 581-9302 Facsimile
(312) 493-0874 Mobile
RWutscher@rw-llp.com
http://www.rw-llp.com
