There was a time in residential mortgage lending in the United States not long ago (2004-2006 was the high point) when more than a handful of mortgage lenders were thrusting hundreds of thousands of dollars into the hands of hundreds of thousands of Americans who were unlikely to be able to pay back the loans ever (100,000² = 1 billion and we are talking about a lot more $$ and and a lot more Americans than that). In the short term, this meant massive commissions and other related fees paid to mortgage loan origination providers, a building frenzy, and steeply rising home values.
A huge number of the resulting loans, however, have been called “toxic” and so on — words that apply equally to sewage. And just as an anomalous spike in sewage will overwhelm a solid waste treatment/removal system, hundreds of thousands of toxic loans laid waste to our financial system with the collapse starting in 2007. When will the clean-up end?
The process of clearing the pipelines of our financial systems is extremely complicated. Even starting at the beginning of a single transaction, apportioning responsibility as between the irresponsible (or just unlucky) borrowers and the originating lenders is a challenging puzzle. Multiply that several hundred thousand times. On top of that, there are layers and layers of other financial transactions tied to each of these loans, as loans are originated, as they are sold, resold, sold in part, securitized, and sold again, again, and again.
Of course, the massive mop-up has been underway now for the past five years and it has a ways to go.
There have been a growing number of mortgage repurchase cases filed in the U.S. District Court, District of Minnesota in recent years. Here is one that Wells Fargo filed last week.
And here is why these cases will help flush out the pipelines fairly efficiently. That is, the previous sentence links to a decisive win by Residential Funding Company (RFC), represented by Donald Heeman of Felhaber Larson Fenlon and Vogt in an upstream lender’s suit against an originating lender of bad loans. As part of that resounding win, plaintiff received an award of substantial attorneys’ fees. (The case is now on appeal before the U.S. Court of Appeals for the Eighth Circuit.)
Minnesota Litigator has a policy of not posting about the author’s own cases but, suffice it to say, Seth Leventhal has handled several mortgage repurchase cases on behalf of the plaintiff/upstream lender with significant success. The lenders that originated toxic loans need to take responsibility for them.