Second Place Wins The Race

Bubble by Don McCrady

About six or seven years ago, the business of residential mortgage lending was a trillion-dollar miasmic bubble (give or take a few hundred billion dollars).

The underwriting standards back then (that is, the decision-making as to loan eligibility) at some lenders or brokers appears to have been a two-part analysis: (1) Will I get a commission (or money in one fashion or another) if the deal goes through? and (2) Will I get away with it?   (Normally, lenders had been giving some thought as to whether or not they would ever recover their loan principal and maybe a little interest.  Thankfully, we seem to be getting back to that old-fashioned analysis again.)

We know how this story went.  And the clean-up is on-going for the next five years or more.

WMC Mortgage, charged with selling many “defective” loans, heard the approaching hoof-beats of the avenging forces, a high-powered group of lenders stuck with “toxic” non-performing loans because WMC Mortgage allegedly sent them defective or non-conforming loans.

At the showdown, WMC drew first, filing a lawsuit in Minnesota.  The next day, the avengers returned fire, bringing their suit in New York state court.

U.S. District Court Judge Donovan W. Frank diverged from the common “first filed” rule whereby courts defer to the “race to the courthouse.” Under the circumstances of this case, however, Judge Frank correctly decided for a variety of reasons that the forum of the second-filed suit made more sense.  The one-day jump that WMC’s lawyers got on their adversary, by itself, did not justify either concurrent lawsuits or favoring the Minnesota one over the New York one.