Tuesday, September 21, 2010


Want to know one of the reasons why banks - but especially Countrywide and Bank of America - have been foreclosing on homes instead of negotiating with distressed borrowers? They're foreclosing, in part, because it pays. Or it's supposed to pay. Check out this interesting turn of events between the banks and the insurance companies.

Before the market collapsed in 2008 banks that held mortgages purchased insurance contracts in the event that they had to foreclose on a house (or had trouble with a mortgage backed CDO). How do we know this? Because on the last day of 2009, Republic Mortgage Insurance Company (RMIC) sued Countrywide, Bank of America, and several other banks because, RMIC claims, either the borrowers or the banks lied during the mortgage origination process. Their pattern of lies is what produced toxic mortgage, so the argument goes. 

In simpler terms, RMIC is claiming that Countrywide, BofA, and other banks were defrauding them as they sought insurance for mortgages that they knew were toxic. RMIC filed suit in New York saying that they were not going to pay out on the banks' insurance claims because there was:

... either a material misrepresentation by the borrower or a material misrepresentation or negligence by the insured, correspondent lender, mortgage broker, intermediary underwriting or processing the loan on behalf of the insured, escrow agent, closing agent, or any other agent or broker for the insured or other person which originated or processed the loan or acted with respect to the loan, or appraiser or other person providing a valuation of the property that is used in the underwriting, processing, or origination of the loan.

Got that?

RMIC says that fraudulent activities were so wide spread that pretty much everyone in the mortgage financial train could have had a hand lying about the mortgage contract that was created. Worse, the banks knew or encouraged it. Ergo, RMIC claims they don't have to pay foreclosure insurance claims.

For their part, Countrywide turned around and sued RMIC, arguing that not only did RMIC compete with other insurers for Countrywide's mortgage insurance needs but that RMIC knew about Countrywide's shady business practices and that they might be insuring toxic crap. To be sure, Countrywide's suit doesn't claim anything about their "shady" business practices, but if you read between the lines it's easy to see the reference. Specifically, Countrywide's suit claims:

In addition to having a sound understanding of how Countrywide operated it's mortgage lending business ... RMIC understood first hand the risks associated with the mortgage lending business.

Reading between the lines, Countrywide is saying ,"RMIC knew we were insuring crap, but they still took our money."

But wait, it gets better.

Triad Guaranty Insurance - one of the companies who also sold forecosure insurance (called "flow insurance") - is so miffed at Countrywide and BofA for misrepresenting their toxic mortgage contracts that they are now denying foreclosure insurance claims too. And just like with the RMIC case, when Triad filed suit in New York, Countrywide and BofA turned around and filed suit in Los Angeles, claiming Triad owes them $111 million for breach of contract and bad faith.

And on it goes ...

All of this makes one thing clear: Not only did market greed and stupidity get out of control before 2008's market collapse, but it appears that many market players in corporate America no longer want to assume responsibility for anything. What this is doing to the integrity of the market and the moral justification of capitalism can't be calculated (yet). But rest assured, none of this is good for America.

Even if it did "save the system" (a dubious argument to begin with), bailing out the banking system, and then paying them 100 cents on the dollar for their toxic contracts, is increasingly looking like the wrong decision.

- Mark


Dr Tim McClure said...


Dr Tim McClure said...


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