Foreclosures and State Attorney Generals

The recent 5-to-4 Supreme Court decision in June which allows states to exercise their own rights against banks and their actions with respect to foreclosures has changed the landscape with respect to the enforcement of rights by the securitization trusts to foreclose on defaulted loans and the pressures now be put on banks by various state attorney generals.

If you remember back, it was the state attorney generals in the early 2000s that took down the behemoth mortgage company Ameriquest. While individually one state attorney general could do little against such a massive enterprise, once they ganged together, even the company that Roland built could not withstand the pressure, paying upwards of $350M to settle the cases.

Now, with this new federal decision as support, the New York Times reported today that frustration by the attorney generals of several states has resulted in a movement towards litigation against the banks. From that article in the New York Times, the Arizona Attorney General Terry Goddard stated "We tried to use the tool to be persuasive with the banks . . . But their waterfall of excuses, the abysmal numbers of modifications, tells us persuasion is not working."

It appears that the State attorney generals will consider using the theory that the banks perpetrated a massive fraud on consumers by offering exotic loans that the borrower could not understand nor could repay. In a prior related matter, Fremont Reorganizing Corporation, formerly Fremont Investment & Loan, settled its case brought by Massachusetts Attorney General Martha Coakley, which claimed, in so many words, predatory lending practices. (See COMMONWEALTH OF MASSACHUSETTS, Plaintiff vs. FREMONT INVESTMENT & LOAN, and FREMONT GENERAL CORPORATION, Defendants).This followed a settlement with Goldman Sachs for its role in securitizing subprime loans, including subprime loans originated by Fremont and a preliminary injunction against Option One and its parent H&R Block.

These actions will probably be a road map for further litigation to be brought against the mortgage companies, banks and investment banks that offered these loans.

The one question that these Attorney Generals need to ask in order to help in these litigations is "why" . . . why would the banks be more willing to foreclosure on a loan rather than modify the loan?