Is it just me or is this pretty huge news that must have serious consequences? Will this ruling changes the "models" od loss in use by the smaryy banks to estimates default rates on HELOC's? If it becomes known that the precedent for this is a lack of due diligence by banks the worst may not yet be over!
P.S. First??
I agree with the judge's decision. These were indeed loans based on the value of the collateral. The fact that appraisal reviews were so poor can't obfuscate that fact.
The reptilians among us never could figure out any realistic basis for recent mortgage underwriting criteria in the ever-expanding universe of "innovative" loans. I guess the judge was old enough to be a reptilian.
If very many judges take this view, we are going to start seeing many more Alt-A downgrades in the next few months.
If it becomes known that the precedent for this is a lack of due diligence by banks the worst may not yet be over!
I think it is extremely important to be clear here: this decision does NOT say the problem is solely a "lack of due diligence." In this case, the Judge did find that Nat City's due diligence was weak. But she went on to opine that even if it had not been, the very guidelines themselves--the "industry standards"--did not rise to the level of something a creditor could reasonably rely on to make a loan decision.
So you could do all the "due diligence" you want, but if it came down to processing the loan under one of these "stated income" programs, the presumption is you just made an "asset loan" or relied solely on the value of the home, not the ability or willingness or likelihood of repayment. Taken to its full implications, that means that all stated income loans would have to be treated, for accounting purposes, as "collateral dependent" loans, meaning they are basically marked to the value of the collateral without regard to any projected future cash flow. I don't think such an accounting change is going to happen without MAJOR struggles, but that is the implication of this.
Amazing...I have never been one to side with huge lenders...but, damn, National City is a victim here (LOL).
This stuff is wild, the Hills are the Jay Gatsbys of today.
"Moreover, the Hills, while not highly educated, were not unsophisticated."
Also, I agree with your last statement...but really were not both borrower and lender party to this. I would have cut the house in half and give each a share.
Tanta...have a great day...if the sun is out here I plan to go for a walk.
Judge seems to split the blame not so much between borrower and lender as between borrowing industry, borrower, and perhaps something (a tongue-lashing) left over for lender.
Do you know what county/state this was in? Interesting that the judge made it the responsibility of the bank to do their homework and investigate their own borrowers.
Ohhh, nasty. I like the implication (because I don't own a bank or RMBSs): "If its a liar loan, and you know it is a liar loan, you can't complain when they lie!"
Tanta...have a great day...if the sun is out here I plan to go for a walk.
Just don't carry a slightly bent Freddie Mac umbrella and mutter to yourself. The neighbors will think you're me. And there go the property values.
Nat City gets zero sympathy for me on this one. Talk about a case of "fool me twice."
While we're on the subject of guidelines, let me mention that everyone has guidelines involving the "seasoning" of a cash-out refi. That means that if the loan being refinanced is 6-12 months old (depending on how conservative you are), then the appraised value used for the cash-out refi is the lesser of the current appraised value or the appraised value (or sales price) used in the transaction being refinanced. The whole point of such a rule is to prevent one from cashing out "vapor equity."
There is just no way on God's green earth that any sane lender would accept that kind of increase in the appraised value in just six months. In 2000 bloody six. So if NCC's guidelines said you could do a cash-out on current appraised value within six months, the guidelines themselves are stupid. It is not a question of a specific appraisal being "inflated." It is a question of how anyone can believe in that kind of appreciation in that time period. In other words, you just wrote guidelines that invite "inflated" appraisals, as you wrote guidelines that invite misrepresented income.
Bear in mind that Nat City was dealing with the increase of a HELOC it had originated six months previously. The original loan file was sitting right there in front of whoever approved the line increase. Again, this is a terrible failure of basic due diligence, but it was enabled by guidelines that allow increases to credit lines based on a new appraisal within a mere six months. You know perfectly well someone at Nat City said, well, that's the rules!
This is the same logic that says if you dress provocatively and walk in a bad part of town, you deserve whatever you get. No legal recourse; you should have known better...
I have no objection to punishing Nat City for idiotic lending. I have an extreme objection to rewarding scum like these folks in order to do it.
And if you rely on an inflated appraisal, that's your lookout, not the borrower's.
Of course. Except the court is not making some abstract decision about whose "lookout" it is; the court is discharging the debt.
So, engage in fraud; never have to repay. Oh yeah, that's a great precedent.
"There is just no way on God's green earth that any sane lender would accept that kind of increase in the appraised value in just six months"
Love your style Tanta. Another implication might be that the investors in National city might want to sue for negligence and the resulting decline in share price
Mortgage brokers and Banks made tons of money selling and servicing loans. i have no pity for anyone up the chain from borrow to wall st bank. People are going to exploit cracks in the system and we need adequate oversight at the our financial institutions. That was absent at Nat city.
The "too big to fail" has been back stopped by an implicit, "too big to regulate of prosectute for fraud", which to me, may be the worst of the two. If this whole mess is quietly swept under the carpet, there may not be much foundation of the system to work with. In fact, the bubble economy is built on the same foundation as Enron and Worldcom. Leverage, off-balance sheet financing, fraudulent accounting statements, absentee regulators, crooked shysters, public misstatements of fact.
We will end up bailing it out but the entire financial industry needs an enema and a cleasing exposure to the sunlight.
RE The Sisterhood of the Snout:
Yes Tanta, I would say so.
I bet the judge's scales were quivering individually as the bank advanced the argument that they had absolutely no idea that a serial cash-out refinancer was living off the "equity" in the home.
I'm glad someone is willing to point out the glaringly obvious. Having to pull 50K out of your home every six months to make ends meet is not a red flag. It's Beethoven on steroids playing a symphony on the theme of "Nearer My God To Thee".
But what still gets me is the "industry standard" behind the idea of stated-income loans - that the borrower is capable of underwriting their own mortgage. Which is BS, and it's time someone did comment on that.
I guess we'd better get prepared for the tidal wave of shocked articles about creditors freezing HELOCs. Gretchen's probably close to an aneurysm.
This is the same logic that says if you dress provocatively and walk in a bad part of town, you deserve whatever you get. No legal recourse; you should have known better...
No, it isn't the same logic at all.
The Judge is applying a clear legal standard of "reasonable reliance."
The bank wrote guidelines that said that it would rely on the unverified representations of people who have every incentive to lie. It did so because it really relied not on the representations, but on the value of the collateral.
Well, the collateral ended up having no value to the second lien holder. So they can't now claim that they relied on a promise to repay the loan in cash. You cannot have it both ways.
Nemo: It is not as if the lender went walking around in the bad part of town in a thong after midnight. It is more like they advertised "Ask me about free money!", held open a bag of the stuff, said, "Take what you need--you do have a good job, right?", and invited the takers back again.
The important thing to remember is that Nat City did this with OPM. Nat City has the responsibility to allocate loans diligently, since the money wasn't theirs to scatter to the winds, but theirs to invest prudently. The Hills are not without some (small) punishment either--they are BK or moving toward it. But the big story is the big lender with the big pockets full of other people's big money. Don't forget that, please.
I'm really glad to see this decision come out. I have no vested interest in the matter, but it's nice to finally see someone the corporate world held responsible for its share of the behavior it explicitly encourages in order to generate new business.
The next logical step is to void credit card debt unless the card company can show reasonable grounds that the cardholder understood the terms of the agreement, with all its 5-point font and legalese.
Business should be based on the honest provision of goods and services, not on what is essentially predation upon the economically illiterate.
Dg: The next logical step is to void credit card debt unless the card company can show reasonable grounds that the cardholder understood the terms of the agreement, with all its 5-point font and legalese.
You are right, but it ain't gonna happen anytime soon. That would undermine the entire economy to the tune of $10 Trillion/year (70% of our GDP is consumer activity), and justice will usually take a second seat to the whole economy.
At the foreclosure sale in April 2007, the first lien lender bought the house at auction for $450,000, apparently the amount of its first lien. I'm probably a little unclear on the details, but this seems to me to indicate that City National thought that there would be so little equity left after satisfying the first that they didn't bother to put in a larger bid. Because if they thought that they could sell the house for $550,000 it would have made sense to bid $450,100 and try to sell the REO themselves. Their actions when spending their own money speak louder than appraisals.
If you want an analogy to crime, it's like a prosecutor relying on prison snitch testimony to put someone in jail when there is no other evidence.
The snitch has nothing to lose and everything to gain by telling the prosecutor what he wants to hear. No responsible prosecutor would go to court relying on nothing other than bought perjury.
Mortgage brokers and Banks made tons of money selling and servicing loans. i have no pity for anyone up the chain from borrow to wall st bank. People are going to exploit cracks in the system and we need adequate oversight at the our financial institutions. That was absent at Nat city.
Yes, yes, YES. I have no sympathy for the bank. But in this case, the cost of punishing them is a court-ordered transfer of wealth to these lying scumbags. That cost is too high, in my view.
Tanta --
So they can't now claim that they relied on a promise to repay the loan in cash. You cannot have it both ways.
Yeah, I understand the logic of the decision. I am objecting to the outcome, which is to reward these folks' deliberate fraud.
The judge is saying, "Sure they lied, but you should not have believed those lies, so I am nullifying the contract." Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!"
I would feel better if these folks were being prosecuted and would see jail time. Rewarding their fraud just to punish Nat City may be "good" law; I do not know since I am not a lawyer. But it is a very unhealthy outcome for society, IMO.
Precedent. What precedent is set here? Are other bankruptcy courts in other jurisdictions obliged to follow it? Can Nat City appeal, saying that a bankruptcy court in, say, Nevada, ruled differently on the same issues, so an appeals court has to resolve the discrepancy? To what court do you appeal in the bankruptcy system, anyway?
The judge is saying, "Sure they lied, but you should not have believed those lies, so I am nullifying the contract."
No, that is not what she is saying.
She is saying, "Nat City gambled on real estate appreciation. It lost the bet."
It is no part of the "contract" that real estate must always appreciate. That is the force of the finding that the loan was "collateral dependent." If you are not "betting" on the borrowers' ability to repay, but rather "betting" on Mr. RE Market, then you deal with what Mr. RE Market does.
The Hills lost the home and are having all their toys taken away from them in Chapter 7. They are hardly getting off scot-free. You want to "punish" these liars so much that you can't see that Nat City created the problem in the first place: it should have been obvious to a child that this application was based on misrepresentations. All NCC had to do was say "no" and the problem would not have arisen.
I have no more sympathy for the Hills than the Judge does, but that's why I would have not just denied their loan application to start with, but would never have written lending guidelines that allowed it to cross my desk in the first place. All NCC had to do was ask for last month's paystub from Mr. Hill--who is a wage-earner, for God's sake--and the whole thing would never have arisen.
Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!"
That is exactly what happens when courts apply the doctrine of caveat emptor. Two hundred years of precedent, of you want to get picky about it...
CR, I think one thing most of the people here are missing is that the 'industry standards' used to underwrite this loan moved it into a dirrerent CLASS of loan: "In fact, the minimal verification required by an income stated loan, as established by the Guidelines, suggests that this type of loan is essentially an asset based loan".
As "asset based" loans are something we do, I can assure you that you better know your assets because there is no way to get anything else. We usually loan 50% LTV and require that we hold title until the thing is paid in full. This is something the bank's legal dept. should have caught immediately.
Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!" The legal term for that is puffery. Things like "The greatest car you've ever seen," are NOT regarded as false advertising because no reasonable person would make a decision based on them.
The Hills claimed that they did not misrepresent their income on the April loan, and that they had signed the application without reading it.
So they lied to the court about a material fact? Is that not perjury?
And Nemo, I am not sure how you get to taxpayers holding the bag on this one.
It is not about taxpayers; it is about rewarding people for committing fraud.
Forget Nat City for a second. Suppose you and I entered into a contract, but I deliberately lied when I signed it. Then suppose a court nullifies the contract on the grounds that you should have known better than to trust me, and you are left holding the bag. How would you feel about that decision?
I do not care what the contract says or what kind of person you are; that result would be both unfair and unjust. What message would it send to me and to people like me?
In the single-minded desire to punish predatory lenders, you folks are praising decisions that will have very unfortunate long-term consequences, in my opinion. Rewarding fraud is not in your best interest.
All that will happen is that the lenders will go to Congress and get the Congress Critters all excited about campaign contributions. Then a new bankruptcy law called "The Citizens Patriotic Relief Act of 2008" will pass mandating that debtors are responsible for everything and allowing creditors to take children, pets and body parts to satisfy debt.
No recession! The worst is over. Yeehaaaw. Little weaker than 1%+ expected. Negative when you factor in inflation. I was thinking it would be at or below .6% the preliminary number.
Suppose you and I entered into a contract, but I deliberately lied when I signed it.
It would depend on whether such reliance is reasonable or not.
Suppose you and I entered into a contract that involved you making the representation that you would perform your obligations thereunder when Jesus returns to Earth to punish the wicked; that you have reason to believe that this will occur next week, and that therefore I may rely on your performance.
It maketh no difference that you were lying out of your ass. The court would find that I had no basis to claim that I "reasonably relied" on your representations.
You can't write any old stupid contract you want based on any old patently ridiculous representations and then claim to a judge that you should be paid back under the "reasonable reliance" standard.
And you bloody well don't get a federal banking charter if you are the sort who finds it reasonable to rely on the premise that people never lie in order to get loans. We have a higher standard than that. The Judge is reminding us of that.
The issue of the lie is did the creditor reasonably know it was a lie or ignored lying in order to make the loan knowing if the default happened they get an appreciating asset to covert the loan and its profit with a bit of profit off of the sale to boot.
In short they allowed or encouraged a lie to make a profit knowing they could go to court and claim their due. Or heads they win, tails they win.
It is no part of the "contract" that real estate must always appreciate. That is the force of the finding that the loan was "collateral dependent."
But the Hills signed a legal document asserting their ability to pay! So you cannot get to "the loan was collateral dependent" except via "you should not have believed them".
This decision implies that if you sign a contract where some clause is a deliberate lie, but the counterparty "should not" have believed that lie, then the court will act as if the clause was never there.
All NCC had to do was ask for last month's paystub from Mr. Hill--who is a wage-earner, for God's sake--and the whole thing would never have arisen.
Sure. But is it really a good idea for courts to be setting underwriting standards retroactively?
And yeah, the Hills are getting punished, but no more than someone in the same situation who did not commit fraud. I have a problem with that.
"Nat City gambled on real estate appreciation. It lost the bet."
Exactly. If the value of the house was increasing and the home was foreclosed why wouldn't this be considered predatory? The lender made the loan without proper condsideration as to whether the loan would be repaid. Now that the value is decreasing the borrower is ruthless.
"I have no sympathy for the bank. But in this case, the cost of punishing them is a court-ordered transfer of wealth to these lying scumbags."
Nemo, if you look at it that way, EVERY bankruptcy discharge is a "transfer of wealth" to the discharging borrower. The possibility of bankruptcy is included in pricing and underwriting.
In exchange for discharging their debts the debtors have to give up all their assets to the creditors and make their finances public record. What would you do instead, revive debtors prisons? How would the economy fare if you put people in the clink for missing a payment?
"To what court do you appeal in the bankruptcy system, anyway?"
Queequeg (and Alo), the appeal will be to the 9th circuit bankruptcy appellate panel, a court of bankruptcy judges from other districts in the 9th circuit. The panel won't get to decide whether lying scumbags should be punished, only whether National City had "reasonable reliance" on the debtor's financial statement, because that is what the Bankruptcy Code requires a lender to show if it doesn't want the debt discharged.
And you bloody well don't get a federal banking charter if you are the sort who finds it reasonable to rely on the premise that people never lie in order to get loans.
I would only add to this a quote I remember reading from Ric Edelman many years ago: "A mortgage is not a loan against your house. A mortgage is a loan against your income."
The only reason mortgages carry lower interest rates than credit cards is that they are secured by collateral - a class of collateral with a decades-long history of price appreciation.
If National City had issued a credit card with a $250,000 limit to the Hills - based on nothing more than their writing "$190,600" in that little "Income" box on the application - instead of a HELOC, would you still be arguing that NCC should be entitled to collect their money even in the event of the Hills' bankruptcy?
Or would you be laughing, as I would, at the sheer naivete of a company that would hand over a quarter-million dollars based on nothing more than somebody's say-so?
Why can't the IRS go after The Hills for the back taxes on the inflated income shown on the loan docs?
why can't the FBI prosecute the borrors for making false statements on a loan doc?
Mr and Mrs Hill could get 30 years for loan fraud and/or pay off all the back taxes plus penalties and interest.
But the Hills signed a legal document asserting their ability to pay!
Yes! And the Judge is saying that relying on simple assertions with no verification when you are lending hundreds of thousands of dollars is not reasonable. And THAT IS THE LEGAL STANDARD for relief that the bank was relying on when it asked to have the debt considered non-dischargeable.
Look, if NCC's guidelines involved verification of income, and the Hills had submitted professional-quality forged documents and had an accomplice to answer a phone verification credibly and had done this consistently in both applications, I am sure the judge would have ruled in NCC's favor. Because she would have concluded that NCC's reliance on these documents was "reasonable." The creditor does not have to be omniscient, merely reasonably diligent.
On the other hand, if it had been a verified-income program and the Hills had submitted documents that were made out of letters cut out of a newspaper and held together with visible white-out, the Judge would have ruled that this, too, was not something you reasonably rely on.
Nemo, Nemo, Nemo. Do not come around skittering around the reptilian feet with talk about "bad precedents" relating to this decision.
We are slow, but our jaws are tooth-filled and inexorable.
These people aren't being rewarded for fraud. They lost their house. I guess they had a good time for a while, but eventually reality came knockin' in the form of a sheriff.
If you are worried about taxpayer money, figure out how much it would cost the taxpayers to put all the stated-income borrowers in jail for six months each. Come on now, let's try to remain in the realm of the possible.
Regarding the claim that Nat City was somehow injured here:
The debt was going to be discharged in bankruptcy. The only argument Nat City had against that was to say they were defrauded. The judge threw that out on the grounds that the borrower's inflation of income was not material information on this loan application. The judge is obviously correct. There is no way Nat City relied on that statement of income to make the loan. NO WAY!!
You could make an argument that Nat City was relying on the belief that the borrowers were lying about their income and that Nat City could therefore hold a legal club over their heads which would make a second lien to collect a debt which was otherwise nonsecured. However, that would make Nat City a participant in multiple counts of conspiracy to commit federal crimes, so I am sure no one on this blog wishes to suggest in any way that this is the case. I certainly am not suggesting such a thing. And certainly the esteemed judge would not make such an unfounded accusation.
This has nothing to do with Nat City wandering into the bad part of town, getting assaulted and then abused again in court.
Nat City owned the town, paved the streets, and chose the occupants, then invited them to a big game of liars poker. It is hardly fair for Nat City then to call the cops when Nat City ended up losing.
You might want to look up the following statutes:
18 U.S.C. § 1014
18 U.S.C. § 1341
18 U.S.C. § 1344
collateral dependent" loans, meaning they are basically marked to the value of the collateral without regard to any projected future cash flow.
Tanta | 05.29.08 - 7:36 am
Minor point. The loans will still be marked to projected cash flows. However, the presumed cash flow may be the projected proceeds to the note holder on the asset sale. The accounting principle will still hold, but the value of the note will not.
Nemo, if you look at it that way, EVERY bankruptcy discharge is a "transfer of wealth" to the discharging borrower.
No, it is not. The purpose of bankruptcy is to protect the interests of the lenders by restructuring debt in such a way that those lenders can get back something instead of nothing. Debtors' prisons do not help lenders. Giving borrowers breathing room to get back on their feet does.
Here, a particular debt is being discharged on the grounds that the lender should not have relied on the deliberate lies made by the borrower. That is a transfer of wealth.
Again, imagine a case identical in every way, but where the borrowers did not deliberately attempt to defraud. Is it fair or just for those borrowers to get the same outcome?
Good q. urbanDigs - and thanks Bankruptcy Lawyer (now, do you think the industry has a shot at overturning?)
Nemo, the purpose of the bankruptcy process isn't always to protect lenders (unless they own the courts along with the town and the streets). It's to protect them if they deserve protecting. In this case, I am pretty sure they gift-wrapped a big package of nothing and pawned it off on the securites industry as a shiny, expensive something. Which brings us back to UrbanDigs's fine query...
Nemo, I disagree. Bankrupcy protection has two primary goals IMHO. First, it prevents the creation of a class of debt-peons, trapped forever in thrall to their creditors whether from fecklessness or misfortune. Second, it helps encourage debtors to start climbing out of their hole earlier, because it discourages lenders from giving out new shovels to people already in the hole.
This decision implies that if you sign a contract where some clause is a deliberate lie, but the counterparty "should not" have believed that lie, then the court will act as if the clause was never there.
Say you're walking down the street and a guy in a beat up car with no plates pulls up next to you, pops the trunk, and offers to sell you a $10,000 widget (that you really want) for $20.00. He insists it isn't stolen.
Should you be allowed to buy the widget and keep it without fear of either criminal charges or having to give it up?
While it is nice to see this small victory. The banks hold the ultimate trump card, his name is Bernanke, and he will make sure that at the end of the day....it's not the banks that are holding the bag.
Thanks to everybody for the back and forth; it has been interesting. The legal decision may well have been right -- "reasonable reliance" does seem a stretch -- but I still think in this particular instance "the law is a ass".
What lesson have the Hills taken away from this decision, I wonder?
"You may decry this ruling as legislating from the bench."
"legislating from the bench".
Oh my!
Justice interprets law as it apply to a particular case. If the case reveal fundamental flaws in the law, is everyone going to wait for the legislator to correct the flaws?
Justice must be served in a timely manner. That is why we have judges.
In this case, Tanta is dead on. The guidelines were stupid beyond a reasonable doubt, and following them is no excuse to come crying to the judge that the debtor is a badass.
If the effect of the ruling appears to "reward" the debtors, well, it just goes on to prove that, at times, life can and do suck.
The judges are being reduced to merely middle class by the same set of criminal bankers, so they are becoming more and more sympathetic to the plight of average people in some cases.
Tanta,
I wasn't trying to be a weenie with a mechanical pencil. What I meant was the accounting change is a "Change in Estimate" and is not a major leap. This issue will not cause restatements. Many of the other topics we discuss should cause restatements, but don't for some non-GAAP reason.
Damn, back to work for me..nice view of the mall today.
Nemo: "No, it is not. The purpose of bankruptcy is to protect the interests of the lenders by restructuring debt in such a way that those lenders can get back something instead of nothing. Debtors' prisons do not help lenders. Giving borrowers breathing room to get back on their feet does."
This comment reflects a fundamental misunderstanding of consumer bankruptcy, where the vast majority of cases result in all debts being discharged with a minimal (
One of my favorite quotes by Judge Wood in the Milken case was that (paraphrasing) "just because they THOUGHT what they were doing was illegal, didn't make it so."
(remember everybody going on about how since they were meeting in dark places and exchanging cash they HAD to be doing something illegal?)
Here, just because the couple THOUGHT that lying about their income was getting them the loan, the judge is saying that the structure of the loan dictates that the house was the only thing that mattered.
Hopefully, Nemo, this helps. What I find heartening is that there is some justice beginning to creep back into the system. Since most Americans have applied for a loan at some point, they identify with the borrowers and are quick to point out and judge the borrowers harshly for any mistakes or lapses in judgement. We aren't nearly as quick to demand that the crooks that perpetrated this mess, at a HUMONGOUS cost to society, do the perp walk and spend some time behind bars.
Nemo: "No, it is not. The purpose of bankruptcy is to protect the interests of the lenders by restructuring debt in such a way that those lenders can get back something instead of nothing. Debtors' prisons do not help lenders. Giving borrowers breathing room to get back on their feet does."
This comment reflects a fundamental misunderstanding of consumer bankruptcy, where the vast majority of cases result in all debts being discharged with a minimal(less than 3% of debts overall) distribution to creditors.
Nemo: "Here, a particular debt is being discharged on the grounds that the lender should not have relied on the deliberate lies made by the borrower. That is a transfer of wealth."
The transfer of wealth takes place when a lender gives a borrower money that the borrower can't repay. Any debt will be discharged in bankruptcy unless the creditor can show an exception to discharge (such as its reasonable reliance on a false financial statement). Whether a borrower SHOULD repay is irrelevant if they can't. Even if National City were allowed to kill the Hills and sell all four of their kidneys it would lose most of the HELOC advance after paying the surgeons.
Nemo: "Again, imagine a case identical in every way, but where the borrowers did not deliberately attempt to defraud. Is it fair or just for those borrowers to get the same outcome?"
In this case, yes. If you change the Hills' situation in only one aspect -- have the bank verify the income but be given false documents -- the outcome would be different.
"Since most Americans have applied for a loan at some point, they identify with the borrowers and are quick to point out and judge the borrowers harshly for any mistakes or lapses in judgement. We aren't nearly as quick to demand that the crooks that perpetrated this mess, at a HUMONGOUS cost to society, do the perp walk and spend some time behind bars."
Well put. Thankfully, the judge wasn't the distractable type.
If this holds, each level of the securitization chain will argue that the level(s) above it exhibited "reckless disregard" in creating and passing-on loan guidelines and then "unreasonably relied" on the data collected to demonstrate compliance with those guidelines!
This would be the legal deathblow to stated and low-doc loans in the US.
This whole issue over borrower responsibility for stated income loans is moot. Even if Nat City had won the case, and had their lien upheld, it's not as if they would have been able to recover anything. The house isn't worth enough to cover the lien (in addition to 1st mortgage), and in all likelihood the borrower doesn't have sufficient assets or income to make significant payments on their debt.
The real mystery here is why Nat City even bothered going through the expense of fighting this issue in court.
I love this meme that people who go bankrupt are somehow receiving some "transfer of wealth" or other free lunch. WTF? They got nothing! They are homeless, their assets (if any) are gone and anything they don't own outright has been repossessed. Yeah there's been a transfer of wealth allright, AWAY from these poor idiots.
Really, now. I've never missed a payment on anything in my entire life, but even I am not dumb enough to beg so loudly to have my cross exchanged for someone else's. If you think bankruptcy is such a walk in the park go for it- don't go to work this morning and stop paying your bills today and join the party.
Bankruptcy and bad credit are a special hell- and they're working harder and harder every day to make it more so. In many places it already gets you on a blacklist as far as certain jobs are concerned. Want more? I'd like to see how you feel when you can't get a job because you couldn't afford your mother's medical bills.
I don't pretend to understand the minutiae of BK law or mortgage underwriting, but I have a pretty good feel for politics, and Vader is 100% correct. There's too much money at stake for too many powerful financial institutions, and they'll wave their big boxes of money under the noses of enough Representatives and Senators, eventually getting a bill through Congress that will mitigate their situation, even if this decision is upheld on appeal. Speaking of which, isn't it likely this will be appealed all the way to the Supreme Court?
--
Tanta: I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan--knowing perfectly well that it is doing so--while shifting responsibility onto the borrower, who is the one "stating" the income and--in theory, at least--therefore liable for the misrepresentation.
Thank you, Tanta, for exposing Bankrupters and Fraudsters for what they really are Crooks. There efforts to bankrupt and defraud American People were deliberate. No?
These people want to inflict death-by-thousand-cuts on the American econo-political system. They are succeeding.
I don't see this as big deal. It is not real estate related as the Security interest had been previously foreclosed off. Although at some prior time it was a HELCO, it was now just a personal line of credit subject to Bankruptcy law. Banks rarely even bother to oppose such a discharge.
A problem I have with this is that without the misrepresentation, they wouldn't have received the loan. It seems one should be held somewhat accountable for misrepresenting income to the tune of almost 3X!
The real mystery here is why Nat City even bothered going through the expense of fighting this issue in court.
For two reasons, I suspect. One is that in dealing with the foreclosure someone who couldn't be shut up at NCC noticed the fraud. Something had to be seen to be done about it, no doubt to make the regulators happy.
Two, heretofore, at least, kicking out a motion to a BK court to have the debt non-dischargeable was a pretty easy thing to do, and I suspect NCC bet that the judge would rubber-stamp it. Tough luck for NCC that she dragged everybody in to testify, made them give her their lending guidelines, and then read them.
The last thing I think NCC counted on was these people having any money at any time in the future to pay the judgment with, although they'd happily have settled it for a couple grand at some point. I suspect they wanted to show their regulators that they are 'cracking down' on fraud.
"Business should be based on the honest provision of goods and services, not on what is essentially predation upon the economically illiterate."
Agree 100% with the 1st statement; alas, i must take exception with the 2nd part alluding to illiteracy.
If there is one thing that the author of "Gotcha Capitalism" has made abundantly clear, it is the financial industry relentless pursuit of maximizing the confusion against the consumer. Some big players (not limited to the financial sector) sponsored clinical trials (!!) to test which kind of forms and invoices induce the most confusion and repulsion in the subject's mind to make the experience so discomforting with the goal of preventing the consumer to analyze clearly what's in it.
I'll bet half of my universe this is legal just because it isn't specifically prohibited by law. But it sure is far from providing quality services at a reasonable cost.
It is also the kind of behavior that will (not "may", "will") invite a zealous regulatory body to start micromanaging businesses 'til they cry uncle.
Francois,
In one of my first jobs, I sorted out the quarterly statements from Wall St. firms and rearranged the data into a readable format for clients. One critical piece of information that was not displayed and had to be calculated was the gain or loss on prior quarter's investment. The much more readable (but still crappy) statements available today are a result of forced legislation.
while I do like my classical...i must say this movement by Tchaikovsky is the sweetest of them all. I believe this will soon be veiwed and reviewed by the crowd on Broadway, and touring as the nations number one opera/musical and quickly be more recognizable than Harrison Ford and his Crystal Skull....
two thumbs up!
MoM, you know how those articulate rants and writings of yours and quick draw on the case law does turn me on to such extreme!
Here's the gist of it: the lender was stupid, the borrower was dishonest. The decision seems to say that punishing stupidity should have higher priority than punishing dishonesty.
UrbanDigs - I'm only half-joking. The point is, the derivitive securities of Alt-A mortgages are spread literally all over the world, and it's impossible to track who is holding which bonds at the moment.
Also, as far as the on-balance-sheet stuff, keep in mind that not all ALT-doc is created equal. I worked with one lender who had 27 different codes for various reduced-doc programs.
Sigh. Every time a legal issue comes up, we once again meet the meme that the law is, you know, whatever you think.
You don't hale someone into court on the basis of unsympathetic behavior. You do so on a specific "cause of action"--for negligence, wrongful death, intentional infliction of emotional harm, whatever. Each cause of action requires that you prove specific "elements," which vary according to the claim. You may need to prove intent, or duty, or failure to meet a standard of care, or whatever, all depending on the "rules" for your specific cause of action. And you need to prove every element to succeed--not just a couple of them.
Here, NC argued the second lien should be excused from discharge under Ch 7 bankruptcy. One of the elements it had to prove was fraudulent misrepresentation; that was fine. I imagine it had no problem proving damages. But it also had to prove another element: reasonable reliance. It didn't. So its claim failed--as it should have.
I'm sure some commenters would prefer a judicial system in which you were found guilty or not guilty, liable or not liable, based on whether some random Internet poster found you sympathetic. Until they found themselves in the dock, of course.
Okay, stated income was acceptable but stated asset valuation was assessed by a formal appraisal and the lender tried to assert the loan was not asset based? GMAFB.
One question - anyone - does this ruling overturn or materially change California's non-recourse status?
I ask that because by understanding was Cali was non-recourse for first loans but fully recourse for seconds, HELOCs, etc.
Also - to Nemo, eh & others whining about the dishonest borrowers 'winning' - they won nothing. Discharging debt without out assets backing them up just means the Hills walk with nothing... as opposed to having the court reattach debt they couldn't repay anyway. Something about stones & blood comes to mind.
In many respects Nat City should be glad they 'lost' the ruling - it will cost them less to write off now (due to the ruling) what they never would have collected anyway.
Also this ruling DOES improve system wide 'moral hazard' - not on the part of loser borrowers like Hills (there will always be grifters & cheats) but rather at the 'control points' where it really matters: at the banks.
Lastly - I really am interested in learning from a lawyer who has seen these kinds of cases go through appeal (1) likely out come? (2) how long will it take the pig to pass through the python?
eh,
ehhhhh, I wouldn't be so quick to assign the benign characterization of the companies as "stupid". Crazy like a fox may be closer, only this time they may have been too crazy too near a TBD legal edge. Whoops.
One question - anyone - does this ruling overturn or materially change California's non-recourse status?
I am of course only a jailhouse lawyer, but . . . it's the net, and as Markel observed we've all passed that bar.
This will not change the recourse status of any loan in any state. However, it would not surprise me to see judges applying a similar standard to a lender's motion for deficiency judgment, wherever and whenever they are allowed to ask for one. If the basis for the deficiency request is that the borrower cashed out and ran, for instance--never intended to repay the loan or make a good faith effort to sell the property without a loss--then a lender could get caught up in having to demonstrate that it made reasonable efforts to establish willingness and ability to repay in the first place.
I say this as someone who has never actually asked for a deficiency judgment except in cases where I believed the borrower committed fraud or willfully damaged the property. So in my experience--in a limited number of states, too, to be sure--asking for a deficiency often involves allegations that the borrower was the badass. Therefore the question of the lender's underwriting diligence and--crucially--the reasonableness of the original appraisal--is very relevant to deficiency judgments.
BTW - this same sort of 'logic' should be applied to banks offering credit card debt under the 'new' BK regime - if the lenders didn't reasonably vet the borrower (blind offer via mail etc.) they really shouldn't complain or be surprised if they get stiffed.
My understanding is the last BK 'reform bill' made it easier for the banks to reattach CC debt and as a result has reduced system wide moral hazard because the silly dears think they'll actually get paid - lol. More blood from stones.
The folks handing out the money have the most skin in the game - they need to start acting like it. If it takes BK judges to remind them - so be it.
In short, while the Court found that the Hills knowingly made false representations to the lender, the lender's claim that it "reasonably relied" on these representations doesn't hold water, because "stated income guidelines" are not reasonable things to rely on.
it's not really clear to me that this decision would have been the same without the presence of the blatant "red flag" ignoring. in other words, if there were no "red flag" present here, would the judge still have been able to say that Nat City didn't rely on the borrower's income to make the loan, just based on the guidelines?
Yes, it's not a simple case of lying borrower-stupid lender. This judge determined that the Bank was reckless enough that they were, in effect, complicit in the fraud.
Personally, I think there ought to be a way for the court to make a finding that the borrower committed fraud, and make that fact available in his/her credit report for the next 15 years.
Arguably, the guidelines were to protect Nat City from those that they later sold the debt to. (whether as individual mortgages or as bonds) "Don't sue us, WE TOLD YOU that all we did was write down whatever crazy shit the borrower told us."
Circling the Drain writes:
Personally, I think there ought to be a way for the court to make a finding that the borrower committed fraud, and make that fact available in his/her credit report for the next 15 years.
Personally, I think there ought to be a way for the court to make a finding that the lender was complicit in fraud, and make that fact available in their credit report for the next 15 years.
What, neither of them will ever work again? Well there's no reason to believe that they've ever had incomes that would support payments on that amount of debt.
in other words, if there were no "red flag" present here, would the judge still have been able to say that Nat City didn't rely on the borrower's income to make the loan, just based on the guidelines?
I think it might have been a bit harder to make that case, but she might have done so. Of course I can't say for sure.
It's like RacerX's observation the other day on the due dilly thread that in many cases it seems as if the "stated income" guidelines were written precisely to hamstring due diligence, not that there wasn't enough due diligence on the loans.
I didn't quote the entire document--I wish it were online so I could link to it--but one of the issues was that Nat City's guidelines required verification of employment (but not income). They did manage to obtain a CPA Letter for Mrs. Hill verifying that she had a business. (This is a typical way of verifying self-employment.) Now, there was a problem that the letter was not signed by the CPA on whose letterhead it appeared. That would surely be a "red flag." NCC did indeed independently verify that the CPA firm was legit. And there is no dispute that Mrs. Hill really had a business--it just made about $26K a year.
But if you think about it, if you can go to all the trouble to get a CPA to write a letter verifying the business's existence, and if you can go to the further trouble of verifying the CPA's existence, why don't you just have Mrs. Hill sign a 4506 and get tax return transcripts in 24 hours for $8? The whole argument that "stated income" saves time and money and is all efficient and shit really breaks down here.
I think you can make a compelling case that such guidelines, in and of themselves, serve to "appear" to be due diligence while obscuring the fact that the lender is going out of its way NOT to know what the income is. Imagine having someone's CPA on the phone and not bothering to ask how much the business grosses! (I bet it didn't gross the income she claimed, let alone net it.)
Similarly, the wage-earner income was subject to this "reasonableness" test where you go out on the internet and use third-party vendors who supply "average" income ranges for various job categories, locations, etc. Well that's more trouble than just asking for at glancing at last month's paystub!
I have indeed myself argued for years that these elaborate "reasonableness test" parts of everyone's guidelines are just plain incriminating. You either believe in stated income or you don't; all this back-room fumbling around proves is that you are capable of verifying income but you don't want to.
It is interesting to note the near-universal opinion that the Hills, the borrowers, should get no sympathy in this mess. And in a strictly legal sense, such as the judge has rendered here, that is as it should be. But one aspect of our economy looms over the bankruptcy problem that, as far as I can tell, hasn't been addressed at all in this thread: health insurance. It may be slightly off-topic, but many, if not most bankruptcies are caused by health problems and the way health insurance companies deny claims and drop coverage. If your child, wife, or father loses coverage and needs expensive care to survive, you will lie on a liar loan. You might even rob banks at gunpoint--you just never know until you get there. This may or may not be the case with the Hills--they blew through a lot of money. But it would certainly seem to be the case in many bankruptcies. We just don't know what they spent the money on, and even if they came by it by dishonest means, we don't know whether it was ill-spent. For the lender to make scads of cash on the front end of a loan, and to rely on its ability to eviscerate borrowers through litigation if it doesn't work out, demonstrates for me a callous disregard for risk, resonableness, and fiduciary responsibility. That such reliances are "industry standard" makes absolutely no difference, especially if industry standards are so completely disengaged from anything that makes sense. Let's face it: the industry lost their heads. They became so indifferent to reality that they went off a cliff "because everyone else was doing it." You can put anything in a contract, but when it comes to litigation, if a judge rules any or all aspects of the contract to be invalid, huge swaths of the contract can, and in this case, did become unenforceable. This ruling makes a lot of sense.
If very many judges take this view, we are going to start seeing many more Alt-A downgrades in the next few months.
You're making an assumption that there will be Alt-As that still haven't been downgraded by that time.
Plus there's overcollateralization, and then there's overcollateralization based on the ability to squeeze blood from a turnip. I think most of the (non-bugged, snicker) ratings models were FUBARed because they assumed prices would always go up, not because they figured that they could get a pile of cash from people who had gone BK. Though maybe I'm giving the rating agencies too much credit.
If this decision means that HELOCs would have to be accounted for differently, then this'll be appealed until the end of time.
I think you can make a compelling case that such guidelines, in and of themselves, serve to "appear" to be due diligence while obscuring the fact that the lender is going out of its way NOT to know what the income is.
oh i agree the case can still be made, i'm just wondering if the judge would have done it. there's no way to know, obviously, but i'd like to see it.
The judge is saying, "Sure they lied, but you should not have believed those lies, so I am nullifying the contract."
Not at all. If the contract were declared a nullity, the parties would go back to their pre-contract state. -- Bank gets its money back, and no lien. The judge is saying "you didn't rely on those lies."
Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!"
Happens all the time. Google "puffery."
This is nowhere near a precedent. What about "The T.J. Hooper"? "Judge Hand held that the standard of reasonable conduct to be applied in negligence cases must evolve as technology did. When faced with the defense by the vessel's owners that most owners of coastal tugs did not use radios and that having one aboard was not the industry standard, judge Hand ruled that the question was not what was common, but what was reasonably possible and knowable to a person of ordinary prudence under the circumstances." A banker of ordinary prudence checks pay stubs, even if his peers don't. Of course, that was 1928...
Congratulations to Judge Tchaikowsky on the ruling, and to Uncle Festus and Tanta for letting us all know about it.
However, I suspect Vader will be right: All that will happen is that the lenders will go to Congress and get the Congress Critters all excited about campaign contributions. Then a new bankruptcy law called "The Citizens Patriotic Relief Act of 2008" will pass mandating that debtors are responsible for everything and allowing creditors to take children, pets and body parts to satisfy debt.
The analogy for me is the disappearance of the proposal to let bankruptcy judges revalue houses.
anta,by any chance was the Hill's lawyer named Linda Green? She made a won a similar argument some months ago in Santa Rosa which prevailed,but if memory serves it was a first mortgage.For those upset with the Hills and who see NCC as a victim,this was a "Stated Income W-2" loan.A STATED INCOME PROGRAM FOR WAGE EARNERS.Is there anyone ,anyone at all that does not think that the "Stated Income" on 100% of these loans was "misstated"?or that they were anything but guaranteed to fail insanely risky asset backed loans?
anta,by any chance was the Hill's lawyer named Linda Green?
The document does not identify the Hills' counsel. It was served to one Joshua Scheer of Scheer Law Group, but I cannot tell if he is plaintiff's or defendent's counsel.
Schnaps, 7 places in 24 years. 2 of those were cut very short by my irritating questions about why we were double billing customers and keeping the cash and why we didn't pay sales taxes for $ millions in hardware purchases. So, let's call it 5 jobs, 4 bosses.
But most have been consulting type roles, so the tasks vary. In the past year I've been on Sarbanes, Contract Revenue Recognition, reconciled Revenue for subcription services and am now implementing a new ERP system. "Run Forrest run!"
I had a brief stint in self-employment, but didn't like the 100 hours a week thing.
The case has very, very minimal precedential value, as it is a narrow ruling on "reasonable reliance", which is always a fact-specific inquiry.
It befuddles me--why spend a gazillion dollars chasing a worthless exception to discharge, even if, as Tanta says, it is to "impress the auditors".
Perhaps a smart accountant would know when this loan would get written completely off, and whether pursuing an exception to discharge delayed its ultimate hit to the balance sheet. Pain delayed is, I suppose, worth something.
A few random thoughts on things which have been raised in these comments:
I don't think that the lender will appeal this, because at this point it's not "binding" precedent on any other court (though it will be cited as "persuasive" precedent in future similar disputes). I think the lender will not appeal it because there is a real risk that the higher court (either the 9th Circuit itself or the Bankruptcy Appellate Panel) could affirm it and it would then become binding on the entire 9th Circuit, which encompasses the whole West Coast plus Arizona and Nevada. The money at risk in this individual case (if there is any at all) is miniscule compared to the risk of this becoming the law in the largest Circuit in the country.
Note that this scenario only really comes up with a "sold out junior," as a first lien in California which is non-judicially foreclosed (regardless of whether it was purchase money) does not allow for a deficiency judgment. Virtually all first liens on residential real estate are non-judicially foreclosed in California. However, there are two exceptions under California law to the bar on deficiency judgments following non-judicial foreclosure: waste and fraud by the borrower. Although I have not seen such a claim asserted by a lender in the recent real estate meltdown, it has occurred to me (and other Cal. lawyers) that the lenders on first mortgages could, in theory, bring these claims, particularly against the mythical "walkaways" who lied on stated income loans. Although this decision is regarding fraud under the Bankruptcy Code, the fraud standard under state law is very similar, and the same arguments would be made on both sides. Again, I have seen nothing to suggest that first mortgage holders are bringing fraud claims on stated-income loans following a "walkaway" but if they did, the arguments in this would be the nexus of the fight.
I'm guessing (really guessing) that the direct economic effect of this decision would be to diminish the "scrap" or "salvage" value of HELOC paper. My guess is that following a foreclosure by the first the HELOC is completely charged off and then sold for pennies on the dollar in portfolio sales. The point of the type fo litigation at issue in this case is often to turn those pennies into nickels; if you can buy a $250k HELOC for $2k and get the borrower to scrap together $5k to $10k you can make some real money (albeit it's one ugly way to do it...). Notably, in the court's docket in this case, there is a notation that the judge made National City file an affidavit after the trial verifying that they own the note, and that they owned it when the lawsuit was first filed.
The debtors in this case were not represented by any attorney and defended themselves "in pro per." While I don't think that is the reason the judge ruled as she did, it adds some color to the dynamic at play.
I'd comment on the arguments here about the value/purpose of bankruptcy laws, but as a bankruptcy lawyer, I'm a bit, ahem, busy these days.
I think the moral hazard piece of this decision hasn't been discussed enough (though Dryfly mentioned it). This is what I like best about the decision. While it is true that this decision isn't precedent, it supplies reasoning for other courts to use, and if we are lucky it will be influential.
Of course no one has any sympathy for the Hills. Moral hazard isn't about sympathy. It's about what will happen next time. If the ruling does turn out to be influential, banks are on notice that liar loans are asset loans, and they can treat them accordingly or take big losses. Similarly with IBs, investors, etc.
Banks et al. took a hike on doing their jobs for a few years there. It hasn't served anyone well.
What about moral hazard regarding the borrowers? This decision doesn't make any difference in the decision making of such borrowers. A similar couple in the future won't condition their behavior on whether one loan in a bankruptcy was discharged or not.
"In essence, the Court found, such lending guidelines boil down to what the regulators call "collateral dependent" loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower's ability or willingness to repay."
So in essence, these stated income loans were really hard money loans?
the cops programs on tv have the video of drunk drivers. If Nat City had put in place a video camera to tape the meetings between the borrower and their loan officers, wouldn'tthis be worth viewing to make our own decision on how much the borrowers were snookering the lender?
Just a few comments to supplement those already given by BankruptcyLawyer:
Dryfly, BK law is federal law. It will always trump state law when they reach opposing results in the same situation. CA's law allowing recourse for refi's is intact but BK is always available to individual debtors whose cases qualify.
National City was seeking to be treated differently than the other creditors whose claims were being discharged. Because of this, the burden of proof rested with them to establish their right to be treated differently than the other creditors. There were specific things they needed to demonstrate. One of them was "reasonable reliance" on the misrepresentations. They could not make that showing. The court's ruling is unremarkable.
This is the first level court in the BK system. Its opinion has no real precedential value. If an appellate court rules in a similar fashion THEN you will have something significant.
Nothing in the BK ruling prevents criminal sanction against the Hills for their conduct if they did, in fact, violate any criminal laws. However, as MOM has already pointed out the cost of prosecuting and jailing all these people is far beyond what CA or any state can afford.
The answer to argument on this thread lies in the answer to...Can you misrepresent your income on a "Stated Income Loan" ? Yes and the bankrupt couple engaged or tried to engage in Fraud. No (and the loan criteria suggest so too) and FCC is just a naive bank who got taken.
Always remember the golden rule, "He who has the gold makes the rules" FCC had possesion of the gold and made the loan rules. The consumers lied (because the bank said it wouldn't check - nudge nudge).
For others pissed about the lender being "punished" for the lies of the borrower, I think gng made a very good comparison relating to stolen goods. Suppose one bought a 42" wide screen plasma TV still in the box for $40, upon the promise of the seller that it wasn't stolen, and the assumption that the police won't find that you bought it. If the police do track you down, and reclaim the TV, they're not going to believe that you actually relied upon the promise of the seller that it wasn't stolen. If the only thing you have is the TV, you might be lucky to not get brought up on charges for receiving stolen goods. But they're not going to get your $40 back. They assume you knew it was stolen and you figured that the trade off of losing $40 for the chance of not being caught with stolen goods was good enough.
I think Tanta is definitely correct to say that the banks entered into the loan only because under the assumption of drastically and monotonically increasing land/house prices made it a safe bet. Either the FB would sell the house, and maybe make a small profot for themselves, or it would be forclosed upon for enough to cover loses. They were wrong, and lost. They are unconvincing to say they believed the lie. They were widely called liar loans back in 2005, and the loan was entered into in 2006 for crying out loud.
No doubt, National City should
have thoroughly verified the income.
No doubt, these borrowers have learned that "lying" will get you what you may need, and certainly what you want.
The only precedent that should result is that "income must be verified for all types of borrowing".
Face it folks, have you ever had to
supply a pay stub with a credit card
application? Has the F&Y man at the car dealership ever made you produce
one? And yet, we wonder how consumers come by feeling that lying about their income is no big deal.
It's back to basics folks-if you want
it, prove you are worthy. Let that be the precedent of the day and then both the consumers and the banks will be protected against themselves! No harm, no foul.
Emma Anne: regarding moral hazard, I think that this is a good ruling. There are a lot of unscrupulous people looking for loans. There are fewer banks, and in theory they're well regulated. The side that should be working to avoid fruad (and passing that cost on to the borrowers), is the banks. There is a much larger moral hazard towards banks turning a willfully blind eye, and then later mimicking my 4 year old with a statement of "I not knew."
Personally, I think there ought to be a way for the court to make a finding that the lender was complicit in fraud, and make that fact available in their credit report for the next 15 years.
Rob Dawg | Homepage | 05.29.08 - 11:00 am | #
Shouldn't the Hills be subject to criminal law for the signing of the papers? I think the that's what the fine print at the bottom says. Maybe that'll satisfy Nemo.
And I'm wondering, what was the constraint that they asked only for a 30% increase. You wonder at what point someone would have said," This is ridiculous!"
dryfly: for an amen, I think it should be that both the lender and borrower should have records of fruad on their credit report. As shown with them correcting parts of the loan documents, both parties fully had the knowledge of fruad.
Shouldn't the Hills be subject to criminal law for the signing of the papers? I think the that's what the fine print at the bottom says. Maybe that'll satisfy Nemo.
That's not that BK judges jurisdiction - the local DA can look into that & press a criminal case IF s/he doesn't have better things to do.
dryfly: for an amen, I think it should be that both the lender and borrower should have records of fruad on their credit report. As shown with them correcting parts of the loan documents, both parties fully had the knowledge of fruad.
anony-1797 | 05.29.08 - 12:10 pm | #
The borrower has the BK on their record - then lender the fraud complicit & extenuating factor.
But in both cases that would be moot without some kind of 'legal finding'. A BK judge can't call it 'fraud' - not in a criminal sense - s/he can just throw out the lenders appeal to attach based on not being 'reasonable' (those 6 points).
Check out what they owe and what they make - they NEVER made over $65K/yr COMBINED - EVER. Yet owed hundreds of thousands plus interest.
Plus, the fondue forkers want these folks to do time for fraud plus have criminal records on their credit reports for 15 years. I'm sure the next proposal is going to be that we put them on a "HELOC Abuser Registry" to prevent them from ever being employed again or living within 100 feet of a building with people in it.
That'll help their future earnings potential, sure.
Wow, how cryptic and cool; wish I could write like that.
Ever here of wage attachment? It's done all the time.
Note: I've not said it ought to be done in this case.
What I've done, and what I believe others have done, is express a certain degree of disgust and outrage that obvious spendthrift scumbag liars (a possible book title comes to mind: 'None Dare Call Them Thieves') could just go Ch 7 and get the debt discharged.
Yah, but that's part of the reason Nemo got all worked up, separating the different crimes committed here.
And although this may not set legal precedent, no doubt the repercussions are more than just ripples in a quiet pond; more like sloshing in a tanker in high seas. Will NCC capsize?
What I've done, and what I believe others have done, is express a certain degree of disgust and outrage that obvious spendthrift scumbag liars [...] could just go Ch 7 and get the debt discharged.
Yeah, we heard you. What the rest of us have done is pointed out that banks have known for some centuries now that, absent bars, safes, alarm systems and, yes, prudent lending standards, people would seek to rob them blind, notwithstanding the disgust and outrage of a segment of society.
Any bank which throws this protective apparatus out the window and relies on society at large to subsidize its new streamlined lending practices -- because there really is a cost to society for the workhouse/garnishment/weigh-your-soul-against-a-feather BK court model -- acts at its peril.
Did their income drop or did they intentionally allow it to drop to qualify for Chapter 7?
You really don't think Judge Tchaikovsky sounds awake and alert enough to have seen to it that these debtors met the "means test" for those who make more than the median?
Good G_d! Who in their right minds would lend money to americans? If one does due diligence and checks you out and doesn't lend you the money...I am discriminating, red lining, bigoted, insensitive, etc. (see The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) If I do lend you the money, I get screwed. I am getting tired of visiting foreign countries and being told that "we like you americans but PLEASE KEEP YOUR DAMN LEGAL SYSTEM AT HOME". This whole thread makes it so much easier to understand their sentiments.
Some of the commenters here are bringing back unpleasant memories of a long and tiring 'discussion' with an old boyfriend who was incensed that the Prodigal Son in the parable got off without punishment while the well-behaved 'good son' had to share 'his' inheritance.
At least one of us learned a lesson from that. People who spend a good chunk of their time fulminating over what they consider insufficient punishment for wrong-doers will eventually take out their anger on a more practical target-- you. Since then I dump the resentful before they give me cause to feel the same way.
I'm going "wow." Normally I wouldn't agree on stuff like this. But the 'devil is in the details;' these loans should never had been made.
Banks speculated on real estate. One good think about the US legal system is bankruptcy allowing a fresh start. It lets Americans take more risks and thus grows our economy; long term this is normally a great thing. Now for the next 3 to 5 years...
Got Popcorn?
Neil
ps
I'm with many of the above posters. This will accelerate the downturn. Its also going to tighten credit. That I'm ok with. Credit is a good thing, but only when its limited to reasonable terms. (e.g., 50%+ DTI's are not reasonable.)
I'm with many of the above posters. This will accelerate the downturn. Its also going to tighten credit. That I'm ok with. Credit is a good thing, but only when its limited to reasonable terms. (e.g., 50%+ DTI's are not reasonable.)
neil | Homepage | 05.29.08 - 12:46 pm | #
This 'lefty' agrees with you - moral hazard is NOT a one way street. We got lots to learn - all of us, banks too - learned the hard way I'm afraid.
My only regret is that I couldn't be the fly on the wall listening to the meetings at Nat City where after the finding their legal team brief the execs. Really, whocoodanode?
Hey, just remember when it comes time for NCC to do its' Ch 13, why it got there in the first place.
BK- the topic of aspiring law schools grads as the next growth industry.
I think what the judge did was absolutely correct. After all, if the bank is handing out money to everyone who can fog a mirror based on ridiculous real estate speculation, when the speculation blows out, the bank gets to share in the pain.
I am sure that the folks who got in over there heads never thought they couldn't sell and get out too- they just stayed too long at the party.
If they had sold in 2006, I bet they never would have gone bk. They would have won at the real estate game, and moved to St. George Utah to play again in their next house.
Generally, the only way the lenders get unsecured debt declared undischargable in BK is to prove some sort of deliberate fraud. It's one thing if a borrower supplied forged tax returns, which is a flagrant fraudulent act, and should be deemed fraud, as such documentation should be "reasonably relied upon". But what of a borrower making "fraudulent" (gasp!) uncorroborated "statements" that exaggerate thier income? Well, that's what this ruling was about.
NCC crying 'fraud' in these circumstances is a rather tenuous claim, IMHO. That's putting it mildly, I might should probably say that it's a stance that takes balls the size of Church bells to be making at all.
I don't think we'll be seeing an appeal on this ruling from Hon. Judge Nutcracker.
Ralph Cramdown writes:
Yeah, we heard you. What the rest of us have done is pointed out that banks have known for some centuries now that, absent bars, safes, alarm systems and, yes, prudent lending standards, people would seek to rob them blind, notwithstanding the disgust and outrage of a segment of society.
Yep. As Ziggurat eloquently posted on another thread: "There is roughly an infinite demand for bad loans at all times. The problems are on the supply side."
Uncle Festus--on your point 1.) You never know. IANAL, but I'm very interested in IP law. ISTR that the Bridgeman Art Library was BEGGED by others not to appeal Bridgeman v. Corel. and create a precedent.
It's not that the bank was careless, "oops we didn't catch this fraud." This loan program was specificly marketed as not having income verification. In the 42" plasma analogy, they told the seller that "WE WON'T LOOK AT THE SERIAL NUMBER." And then they "returned" the tv to Best Buy because there were missing pixels.
You may be right re the appeal, and the lender might just appeal to clear its good name (which has now been dragged through the wringer on a certain well-respected, high traffic, blog...). But in my experience, banks are businesses which see the same issue in hundreds, even thousands, of cases and choose their appellate fights pretty carefully, as they know that any binding precedent in one small-dollar case could have a catastrophic impact on whole portfolios. Usually the ones they take up on appeal are those where the facts are unsympathetic to the borrower and these facts are pretty sympathetic (though the judge did find that the borrowers' claims that they didn't read or understand the loan application was 'not credible'...a polite way of saying it was BS).
In any event, the period to file a notice of appeal is ten days from yesterday. As the deadline would fall on a Saturday, the last day for them to appeal is Monday, June 9. I'll let you all know if they appeal, though by that time I'm sure the discussion around here will have long since moved on.
I am certain that there is no double jeopardy issue. Crimes often come to light in bankruptcy cases and are then prosecuted. The bankruptcy case itself is not a criminal prosecution for a crime, so there's no issue re double jeopardy. As a practical matter, though, I think the chances of any prosecutor(state or federal) spending any resources on this are zero, particularly as the bk judge ruled that their conduct didn't even give rise to a fraud ruling.
Is there any issue about double jeopardy here? Their misrepresentation has come to light because of this BK case.
bananatree | 05.29.08 - 1:49 pm |
I didn't stay at a Holiday Inn last night but my guess is no double jeopardy here - BK is civil not criminal.
HOWEVER if the judge finds there is substantial evidence suggesting a criminal case my understanding is s/he HAS TO refer it to the appropriate authorities (local, state, federal - depending under which jurisdiction the offense falls).
That 'has to' has some leeway but as an officer of the court - if s/he discovers a 'smoking gun' then s/he has to refer it for prosecution by SOMEBODY.
Now that 'somebody' might say "Thanks - I'll get right after it soon as I finish the cases on these meth labs we've busted and the two serial rape cases we have going on..." meaning nothing really happens - but I believe these folks ARE potentially in jeopardy should somebody not have something better to do (or craves attention on a certain high traffic RE blog).
I doubt the judge does much - just lets the public record speak for itself & if inquiring minds over at the DAs office want to look then they shall find.
Maybe Uncle F above can make this his own personal Idaho & keep us posted. Lord knows there are worse offenses to the OT jay walking laws occurring here daily (dryfly sheepishly raises hand - me).
Good G_d! Who in their right minds would lend money to americans? If one does due diligence and checks you out and doesn't lend you the money...I am discriminating, red lining, bigoted, insensitive, etc.(see The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) f I do lend you the money, I get screwed. I am getting tired of visiting foreign countries and being told that "we like you americans but PLEASE KEEP YOUR DAMN LEGAL SYSTEM AT HOME". This whole thread makes it so much easier to understand their sentiments.
Actually, it is your comment that makes it so much easier to understand their sentiments. Can you please quote where in the Community Reinvestment Act it says that you can't do due diligence?
Citing the Community Reinvestment Act in context of the current mortgage crisis is a positive lab test for congenital idiocy, and thus, highly suggestive of multigenerational incest.
Please pray tell what DA would pursue a criminal fraud case when a judge has reviewed the contract between the Hills and Nat City and ruled that the income misrepresentation was not a material fact relied by Nat City on to extend the loan?
Sniglet writes: The real mystery here is why Nat City even bothered going through the expense of fighting this issue in court.
That's a good point. Maybe they thought they could sell-on the HELOC debt for 10 cents on the dollar... or perhaps they were just trying to set a precedent for future cases... well, they got one!
No judge should reward anyone for lying on a business contract. This decision will further encourage lying on loan applications as well as walkaways from underwater mortgages. Worst of all, if this decision stands, it will further drive lenders out of the mortgage market.
On the bright side, this may decimate the entire practice of stated income loans. While there are occaisional valid uses for stated income loans, there are too many opportunities for fraud, exploitation, and over-extending.
If this leads to the end of stated-income loans, then the costs are probably worth it.
"Nothing in the BK ruling prevents criminal sanction against the Hills for their conduct if they did, in fact, violate any criminal laws. However, as MOM has already pointed out the cost of prosecuting and jailing all these people is far beyond what CA or any state can afford."
However, I would like it if the all of the new FHA/GSE programs for upside down borrowers would take a look at the original loan docs and disqualifer borrowers who lied.
IANAL, and please just quote the answer if it's already been stated (I only read the first half of the responses), but... wouldn't the borrowers also be guilty of fraud, at least criminally (if not civilly)? Didn't they also commit perjury?
I applaud the ruling; it was rational and well thought out, and should serve as a wake-up call the all the lenders who gave out billions in liars loans knowing they were fraudulent and not caring. They were implicitly relying on only the asset value, and those debt should be able to be discharged during bankruptcy.
Regardless of that, though, the debt discharge should not nullify the penalties for the obvious criminal behavior on the part of the borrowers, right?
Reading the Nemo - Tanta chain, I feel like that debate can be recast differently.
The people that defend the court ruling - e.g. Tanta - feel strongly (and probably correctly) that the legal decision in this case is justified given the facts of the case and the letter of the law.
The indignant response from some of the posters, e.g. Nemo, stems from a perception that the spirit of the court ruling is sanctioning and even encouraging personal fraud. That negative reaction leads to strongly question the judge's decision on the basis of its social justice implications.
In terms of dispensation of justice, NCC has been punished. Their claim has been emphatically discharged and they have been told to go mingle with high speed highway traffic. They have already lost their full HELOC principal balance (to the extent to which they retained the loan on balance sheet) so they are not doing very well at all on this particular loan. More holistically, their stock is down from a high of 39 to its current value of 5.5. They drank their own poison too, they have 18B in HELOCs as of March 2008 vs. a market capitalization of ... 4B. There is no way to spin that in a positive way for them and their stakeholders, and clearly whatever they were doing on the origination side has backfired miserably for them. Some people hate them for their underwriting recklessness (other pity them for the lack of business sense) but there is ample opportunity to feel vindicated.
Has NCC broken specific additional laws (e.g. discrimination, misrepresentation, etc.)? Then they should of course be prosecuted to the full extent of the law - since the law applies to everyone equally.
On the other side, the Hills have lost their home. Given their household balance sheet it was only a matter of time until that happened. Other honest borrowers have had a similar misfortune in recent months and it is surely a traumatic event in one's life. However, something is different about them. They have been proven to have committed fraud. There is proof. This is not a minor infraction, e.g. jaywalking. They knowingly committed fraud (with the implicit complicity of the lender) to appropriate hundreds of thousands of dollars.
Yes, rape and murder and robberies take priority and should be prosecuted ahead of this fraud charge. But I suspect that real revolt that people (and I will include myself in that category) felt was at the notion that the Hills should get a free pass from the law.
"No judge should reward anyone for lying on a business contract. "
The judge did not reward lying in a business contract. In this case, it was found that the lie was not material to the decision to lend. The judge ruled that only an idiot would rely on stated income so grossly out of line with common sense and that the lending guidelines did not reflect reasonable standards for lending based solely on consumer stated income. National City failed to prove they were idiots and failed to demonstrate that their lending guidelines were fashioned to avoid blatant misstatements of income, therefore the judge found that National City did not rely on stated income but rather relied upon factors other than stated income to proceed with the loans, i.e., the expected real estate appreciation.
People lie in contracts all the time. When the contract goes into default, the judge looks to see if the lie would have materially affected the decision to enter into the contract. In this case, the judge rightly found that the stated income of the Hills was not the deciding factor for Nat City in proceeding the the mortgage. You cannot enter into a contract with known, or reasonably should have known, misrepresentations and expect a judge to enforce performance when you chose not to protect your own interests in the first place.
I think that the discussion above indicates that it is probable that they made a false statement. It is not proven that they committed fraud. Given that NCC brought the case, it seems likely that the loan officer was not complicit in the false statement, but that is similarly not proven.
Further, they were not given the loan based on their false statement. The finding of fact by the judge is that they were given the loan based on the collateral. The judge found that the false statement was immaterial to their "gain".
As a real estate investor, I have signed loan documents with errors on them. Once it was a missing rental property because we have a couple that are almost identical to include the loan number. Another time it was an error in the IRA assets. Those are the ones I remeber, I'm sure that I noticed others over the years. If something horrible happened to me and I defaulted on my current primary residence loan, which no doubt has an error somewhere in the documentation package - I would hope that the judge would make a similar determination of materiality should the bank come after me.
I'll re-iterate my comment that an appropriate penalty for such false statements is to be ineligible for the increasing large number of federal goodies being passed out.
It is a stretch to argue that the Hills' income 'misstatement' is akin to an inconsequential typo.
It is also difficult to take pride in a legal system that doesn't punish people that engage is such activities. Think of all the honest hard working renters for example that would have loved to have bought their own home but could not afford one. What's worse they were unwilling to lie on a legal binding document in order to inappropriately secure what wasn't rightfully theirs. The sad sobs.
The life lesson that is being taught to the next generation is that when you perceive an opportunity to exploit the legal system, you should jump all over it before someone else does it. Hard work and thrift are for losers.
And for the Hill apologists on this forum, to support that point of view with a sense of pride in the technical prowess and accuracy of one's technical legal argument is like boasting about the elegance of the woodwork on the sinking Titanic. True but irrelevant and missing the point.
The Judge did not rule that the Hills' misrepresentations were equivalent to a typo. She ruled that they were material misreps made knowingly by the Hills. However, NCC had to prove MORE THAN that in order to get the debt reattached.
She ruled that NCC did not meet the sixth of seven legal requirements for reattaching a debt in bankruptcy. She was obligated to rule on that question because that was the motion before her.
This was not a criminal trial of the Hills. The Judge did not have the option of ruling on NCC's motion by finding the Hills guilty of the crime of fraud. She does not preside over a criminal court.
I have seen no one on this thread "apologize" for the Hills.
The fact, however, is that stated income lending will go on as long as lenders find it profitable. And it will be profitable under a "heads I win tails you lose" setup where they either get paid back because of property appreciation or, if values decline, they can make the borrowers assume all responsibility for the fraud in which the lender was complicit. The only thing that will get through to these lenders is nasty experiences like this one with Judge Tchaikovsy. I am personally less concerned with what happens to the Hills than I am with what happens to our entire economy, and I say loose lending is threatening us all and needs to stop. You are free to disagree but you are not free to claim I'm apologizing for two-bit losers like the Hills.
As a number of our legal commenters have asked above, can everybody quit ignoring the fact that this was a ruling based on a specific set of requirements of a specific cause of action in a civil adversary proceeding that is not a criminal court? I know it's easier to just kibbutz about how everybody hates the Hills, but who the hell cares about that?
I see this an a compliment to the argument put forth by bank apologists, which goes, 'well people losing their houses due to insane sub prim loans have no one to blame but themselves, they should have read the loan paperwork and understood what they were getting them selves into with neg-am loans and such, the loss of their home should have been a forsee-able risk, no one force them to take out a mortgage',
In this same way, the bank in this case, should have done some research, and used prosper guidelines. No one forced them to lend them money and default is always a risk that needs to be taken into account.
Tanta. In the previous post I had specifically agreed with you by arguing that challenging the judge ruling was not the relevant issue. I have no reason to believe it was a bad ruling.
The only point is that the Hills should have to face separate, unrelated criminal or civil fraud charges.
Hills' income 'misstatement' didn't have to be a 'typo' to be ruled to be inconsequential in the lending decision.
Note: this only became a big-honkin'-pernicious fraud (gasp!) situation only after the HELOC lien was foreclosed out, leaving our bagholder with an empty, soon-to-be-discharged sack-o-nothin'. And her honor called BS on that.
Any day now, some old d00d is going to die thanks to popping Viagara that he was prescribed from an online doctor who never met him in person. Should we blame the deceased for making his doctor rely on 'fraudulent statements' that he made attesting to his 'excellent cardiac wellness'?
InvisibleHand: This decision will further encourage lying on loan applications as well as walkaways from underwater mortgages. Worst of all, if this decision stands, it will further drive lenders out of the mortgage market.
No, no. As you note later in your reply, it may curb the practice of granting stated income loans. Well, at least for wage earners where the stated income is not even remotely plausible, and when the CLTV is high. But that's about all it could possibly accomplish.
This is a pretty narrow ruling by one lowly judge in a rather extreme case. At least I hope it is extreme, because the last credit extension appears to have been sheer lunacy from the facts listed in Tanta's post.
What's really hurting mortgage lending are these types of loans detonating in everyone's faces.
You all seem to be missing the point regarding "punishing" the Hills.
Bankruptcy is a CIVIL judgement, not a criminal judgement. Fraud is a criminal case. The bankruptcy judge made a ruling on the civil case, which is all she was legally able to do. She can't find them guilty for criminal fraud in a civil case! It is worth noting, as Tanta stated, that she called them reckless, strong words from the bench.
If NCC wants to take the defendants to court for criminal fraud, they are not going to do so in bankruptcy court. So far as I know, there is nothing stopping them.
Polonius writes: What I've done, and what I believe others have done, is express a certain degree of disgust and outrage that obvious spendthrift scumbag liars (a possible book title comes to mind: 'None Dare Call Them Thieves') could just go Ch 7 and get the debt discharged.
Obvious spendthrift scumbag liars?
So 10 years back there was no fraud in the loan applications because only honest people existed on earth at that time?
Since time imemmorial there have been idiots, fools and cheats asking for loans. The lenders should just take their word and give it to them?
No one, NONE, ever was mandated to believe these bums and give them loans without diligence. The loan was made based on the hope RE value going up, and not income.
You (and the bank)pretend and believe that the loan was made on the basis of the stated income. The judge says - Are you kidding? Since when does anyone hand out money like that? You made the loan on the basis of the RE collateral, not on the basis of stated income.
You believe that it is OK for the stronger party - the bank - to enter into contracts that result in the destruction of the weaker party, the "scumbags". [strong & weak based on who has the power to make or deny the loan].
Given the choices
(a)the bank makes the liar loan, a reckless loan, and after the 'scumbags' default, grind them throughout life
(b)the bank not make the liar loan and leave the 'scumbags' to plod along in whatever wretched existence they could have had
you insist on the first. I think that you would insist that the bank MUST make the loan, so that the whole shebang follows and the 'scumbags' get fried, just so that you could sleep well knowing that its a dog eat dog.
It is worth noting, as Tanta stated, that she called them reckless, strong words from the bench.
And if everyone would quit barking about the Hills not being sufficiently punished, they might have noticed the specific context in which the bench issued those words:
Even if the Court were persuaded that they had signed and submitted the October Loan Application without verifying its accuracy, their reckless disregard would have been sufficient to satisfy the third and fourth elements of the Banks claim.
She is saying that A BORROWER signing and submitting a loan application without verifying its accuracy is displaying "reckless disregard," which has legal meaning.
So forget the Hills, who are clearly guilty of material false statements. This suggests that Her Honor thinks that ANYONE who does the old "I didn't read the loan docs, I just signed them" is displaying reckless disregard. Even people who did not state income and did not lie.
Um, that's indeed strong language from the bench. It suggests to me that these folks who come into Tchaikovsky's courtroom bleating on about how they didn't know they had an ARM because they didn't read the papers or they left the income part of their application blank and the broker must have filled it in later will get little sympathy from this judge.
Criminal action will depend on the DOJ or the local DA depending on which law is actionalble in this case. I thought the case we were discussing was in civil court. I guess the judge can make a referal. I don't know jack about the law.
The comment list was too long for me with my tiny reptillian brain to search for a comment that already covered this.
So just shoot me.
Folks, this is not as complicated as some are making it.
Yes, the borrowers committed fraud. However, as we all know (or I hope we know by this point), this fraud was invited and encouraged by the lending standards in question.
And as the bank is therefore involved in soliciting fraud and its policies establish a pattern of doing so, they are unlikely to get the better side of any judgment taking this into account, where the borrower does not ALSO have a pattern of commission of fraud.
In nearly all cases, the borrower will have one fraud to his credit - falsely stating income or assets to qualify for the loan - where the bank will have hundreds and thousands of such cases on its record.
Personally, I would go even farther than the judge did and order the bank to compensate the borrowers for the borrowers' losses. The banks were the ringleaders of the fraudulent enterprise and as such enticed many people who would never have been involved in any fraud whatsoever to participate in a mortgage such as this.
Only in a case where the borrower was also involved in other types of fraud would I view the two parties' participation as equivalent. In how many cases will we find the borrowers up to their neck in fraud, as we find the banks?
(My last comment, unless maybe someone asks another Latin question)
sdtfs and Polyphemus --
Well done. (Love "Clytemnestra's Sister", too.)
"Observer" hit the nail on the head. I am not claiming anyone is apologizing for the Hills. I am not claiming the ruling was wrong as a matter of law. Not being a lawyer, how would I know?
I am claiming there is something wrong if the Hills receive the same treatment as any family in the same situation who did not deliberately attempt to engage in fraud. They will not be prosecuted because the law is too "busy"? Or maybe because too many other people did exactly the same thing? That is really sad.
This particular decision may be so small as to set almost no precedent. Again, not being a lawyer, I do not really know. But I do detect in the tone of the judge's ruling -- "a poster child for some of the practices that have led to the current crisis in our housing market"?? -- a certain desire to "stick it" to the lender. I do sympathize with that desire... But if other courts feel and act similarly, especially if it works to the benefit of lying borrowers, then I do worry a bit about the unintended consequences.
My desire in this crisis is for absolutely everyone, from borrowers to brokers to lenders to investors, to get precisely what they signed up for. Court-mandated "cramdowns" and the like interfere with that, and thus violate my sense of fair play / karma / etc.
The court's reasoning that NC didn't rely on the misrepresented income is laughable. Are we to believe that NC has no debt-to-income ratio prerequisite for loan approval? Good Lord, this loan doesn't even happen without reliance on income - it's a primary component of the loan. Terrible reasoning.
Of course the loan was centered on its security interest. Of course. But to allege that NC could care less about ability to pay is ridiculous. NC is not a property management company and doesn't want to own these homes. Homes that immediately go into default due to lack of ability are generally bad news and create huge expenses. Ability is always an issue.
That leaves us with the court's second line of reasoning - even if NC did rely on the misrepresentation, such reliance was not reasonable. I'm sorry, but NC was following its established business practices. These practices conformed with the industry standards. The end. But the court has to stretch and reach for the "red flag" exception - unbelievable, this judicial activism.
Are we to believe that NC has no debt-to-income ratio prerequisite for loan approval?
The facts of their business process prove that that was indeed the case; that is why they simply took whatever figure was stated to be good enough for them, without verification.
A bank won't take a person at their word for establishing a checking account; they will verify identity and that the person does not have a history of abusing checking privileges.
How then could they possibly claim to be relying on simple stated income figure (where the borrower knows ahead of time the figure won't be checked)? The policy of making no effort to verify the figure makes explicit that they were not in fact relying on that number.
The ugly truth is that they didn't rely on any numbers at all, except the commission fee and the guarantee that no matter how garbage a loan they extended, they could find a sucker to sell it to. Only when the gravy train came to a screeching halt, and they were left holding a lot of the garbage they'd planned to pawn off to others, did they show the slightest care for the quality of the borrower.
Collateral dependency is the root of the problem. Stated income loans were absolutely, completely collateral dependent. We have more loans that are "prime" stated income loans that will default after the sub prime liquidations bring down the value of the "prime" borrowers homes.
Seems to be a fair ruling in my opinion in regard to "asset based loan".
Goodbye to stated income for a long time. Hello to a depressed housing market for quite some time.
The clarity of the judge's thinking is suprising and unexpected. Should
logical thinking startle me to this degree,
or have I just been desensitized by seeing bat shit crazy thinking for too long?
Is this judge politically immune from
the lender lobby?
This particular decision may be so small as to set almost no precedent.
I'd argue that the precedent was set long before this ruling. So far as I can tell--and I'm not a bk lawyer either--it was a very narrow ruling within the bounds of a well-established law. The lender played with fire and got burned, first by the borrower and second by their own policies.
Wes--
That leaves us with the court's second line of reasoning - even if NC did rely on the misrepresentation, such reliance was not reasonable. I'm sorry, but NC was following its established business practices. These practices conformed with the industry standards. The end.
Just because the business practices were established and "industry standard" doesn't mean they meet the legal standard for reasonable.
This is mainly directed at the "Hill haters" out there. I don't know if they took monthly trips to the islands or got desperate for cash because of the general reason people wind up in bankruptcy court - a medical/job loss crisis. Doesn't matter.
What IS important is that a massive fraud was perpetrated on the taxpayers (bagholders of last resort) by people who specialized in loaning money - and shoved it out the door to anyone who could fog a mirror.
They employed "liar loans" because they didn't want to be limited to people who could actually pay the money back! Much ado has been made about the Hill's "fraud," but little attention is paid to those who suborned, abetted and encouraged that fraud.
How many times did this conversation take place?
"So you need $50,000, Mr X, is that correct?"
Yes.
"Now I notice that your income was $150,000 last time we talked. Now, as I'm sure you know, adding another 50k to your debt would require an additional...um...40k in annual income." Pause. Big smile. "But I'm sure that your recent promotion to assistant manager at Burger King carries at least that much." nod nod, wink wink "Right?"
"Um...right."
"Good - then I'll just put 190k for income, and if you'll just sign here, we can get that money in your account right away." Beaming, as he stands to shake hands (thinking of the fat commission and killer bonus he's gonna get), he says "Sorry to be so rushed, but we're just swamped around here - there's already another nice couple waiting outside."
Or alternately, he just hands them the paperwork and says "Don't worry about that income figure, it's just what we have to say to get it through. Your house is the collateral." nod nod, wink wink
Or he simply shoves the papers at em and says, "Sign here and we'll get your check."
So who committed the fraud - and upon whom?
I submit it was Wall Street and the banks who were the criminals - and we're gonna find that it was (among others) pension funds and the taxpayers who were victimized - while the fatcats bought Ferraris.
Is this judge politically immune from
the lender lobby?
This is a federal judge...lifetime appointment. If she wants appointment to other courts the political process comes back into play. If not...
Tom Stone: didn't you write earlier of a lawyer-acquaintance who had successfully made a similar argument regarding misrepresentation materiality?
I'm curious what this line of reasoning, if generally adopted, would do to the "warranty and representations" under which this effluent was packaged into securities and sold to small Norweigan towns.
Actually, bankruptcy judges are not full-blown federal judges, with a lifetime appointment. Bankruptcy judges are "Article 1" judges, as their appointment is made pursuant to Article 1 of the Constitution, whereas a federal judge is an Article 3 judge. Bankruptcy judges are appointed by the circuit courts, and serve 14-year terms. They can be removed by the circuit court, but almost never are (i.e., they don't need to be impeached). The larger point re the judge being immune from political pressure is valid however, as a 14-year appointment is pretty long and they are usually reappointed if they want to keep the job. While bankruptcy judges do have individual biases (who doesn't?), and some are perceived as more "creditor oriented" and others as "debtor oriented," I don't think that there is much of a political angle. Generally bankruptcy judges were themselves bankruptcy lawyers, or at least commercial lawyers, so if there is any bias it's probably a result of their prior lives in practice. At least that's been my experience, and I think most bankruptcy lawyers share that view.
They employed "liar loans" because they didn't want to be limited to people who could actually pay the money back! Much ado has been made about the Hill's "fraud," but little attention is paid to those who suborned, abetted and encouraged that fraud.
So if the all the liars like the Hill's get charged with fraud, maybe NC exec's & brokers & MBS salesmen should be charged with 'conspiracy' - with the counts equal to the number of similar loans they have outstanding?
We don't have that many cells.The old Soviet Gulag didn't have enough space.
It's sad to think that reading of the Ownership Society's rubble is causing me to learn more about bankruptcy law than I'd ever hoped to learn.
Tom | 05.29.08 - 11:47 pm | #
I was encouraged to study BK as part of my MS in Mfg Systems - if that isn't a depressing commentary on the state of American business - I don't know what is.
eh writes:
Here's the gist of it: the lender was
stupid, the borrower was dishonest.
The decision seems to say that
punishing stupidity should have higher > priority than punishing dishonesty.
Oh yeah, that's a great precedent.
eh | 05.29.08 - 10:16 am | #
The judge is making the point that both lender was dishonest, not stupid. As
WC Fields said, you cannot cheat an
honest man.
As a long time reader and general fan of this blog, I am quite surprised and disappointed at the reaction of both Tanta as well as most posters. Away from the particulars of the Hills' situation, the general poster bias revealed herewith is one where the borrower is the victim and the lender is the Ferrari driving perpetrator.
It is as if the posters on this forum have spent the last 1-3 years in a collective farm in rural Soviet Union of old. Has anyone bothered to look at what has been going on on Wall Street? Have you seen broker dealer stocks? Have you seen bank stocks? Have you looked even at the stock market performance? Have you seen GDP growth? Have you read about the government stimulus plan?
The banking system is in disarray. The very people that are portrayed as having profited from these 'liar loans' and having victimized borrowers to enrich themselves ... are getting fired in droves and are seeing their own deferred compensation being slashed by 90% or more in some cases (e.g. Bear Stearns).
No one is crying for them by any means - but to suggest that they have been plotting to achieve this sad state of affairs is naive and ludicrous, and only reveals a near-communist bias ("uh here come the evil money grubbing lenders who are raping widows and orphans"). The reality is more like the lenders have been stupid and made some horrible business decisions that they are paying through their nose for.
The banking system is in disarray. The very people that are portrayed as having profited from these 'liar loans' and having victimized borrowers to enrich themselves ... are getting fired in droves and are seeing their own deferred compensation being slashed by 90% or more in some cases (e.g. Bear Stearns).
The ringleaders seem to have made out with glittering golden parachutes, while people who weren't in a decision-making capacity eat the downside.
And if they are impoverished - so what? These are the prime hands involved in the misallocation of capital, they deserve to end up in the poorhouse a lot more than people who are actually ending up there. If justice is to be served, they should have anything they have left that they earned from perpetuating fraud taken from them to defray the costs borne by the public as a direct result of their actions.
Why is everyone concerned about poor little NCC, and only targetting the Hills as the Fraudsters? NCC blew OPM. Lot's of it. Collected Fees. Big Bonuses. They thought they had framed up the Hills as the fraudulent party, and slept well at night.
The Hills are now toast.
OPM is toast.
The NCC folks might have to get new jobs whenever they go TU, but they get to keep their fees and bonuses....nobody is hunting them down for fraud.
No one is crying for them by any means -
but to suggest that they have been
plotting to achieve this sad state of affairs
is naive and ludicrous, and only reveals a
near-communist bias ("uh here come the
evil money grubbing lenders who are
raping widows and orphans"). The reality
is more like the lenders have been stupid
and made some horrible business
decisions that they are paying through
their nose for.
Reader,
1) so how are they paying through the noses for it? Are bonuses and fees
going to be returned? Didn't think so.
The investors are toast. But the "businessmen" who made these loans are most decidedly getting off the easiest.
2) So we have a communist-bias? Who wants to socializes the losses, comrade? (hint: the lenders) Let's privitize both gains and losses, or regulate both, eh?
3) I'll grant that none of them plotted to produce a grand credit collapse - one doesn't need a grand conspiracy, when the fees and bonuses for cycling OPM explain the feeding frenzy quite easily.
If neither the tax payers, nor the pension fund investors have to suffer the sins of the fund managers and brokers, then I'll have a little sympathy. Near as I can tell, we aren't there yet.
I would only add to this a quote I remember reading from Ric Edelman many years ago: "A mortgage is not a loan against your house. A mortgage is a loan against your income."
At least in California the mortgage is exactly a loan against your house. If you don't pay it, the bank could only get the collateral (home), but not your income - uness they do juridical foreclosure which is not a reasonable option here.
The only reason mortgages carry lower interest rates than credit cards is that they are secured by collateral - a class of collateral with a decades-long history of price appreciation.
Do not forget the Fannie and Freddie - something credit card loands have no access to.
WC Fields said, you cannot cheat an
honest man. Well you can, but it's harder because he won't tell you what lies to tell him and make sure that you know that he won't be checking up on any of them.
While I have no pity for the borrowers, I completely agree with the decision here.
NatCity and most other lenders require(d) a 4506T to be signed at closing for all Stated Income loans(IRS Form "Request for Transcript of Tax Return" authorizing lender to pull borrowers tax returns). Funny thing is lenders rarely pulled the tax returns (until the meltdown began, of course) for an obvious reason - THEY DIDN'T WANT TO VERIFY THAT 80% OF STATED INCOME BORROWERS WERE MISREPRESENTING THEIR INCOME...
At the end of the day, as pointed out above, the judge was left to decide who to punish - the admitted fraudsters (and this was no minor fudge - they tripled their true income) or the lender whose acts conformed with the widespread industry standard. The entire point of the business practice/industry standard test is, in part, to counteract judicial bias and activism and provide an easily referenced code of conduct to establish reasonableness. This judge's reasoning is a fine example of judicial activism at its worst.
I thought the entire point of a business practice/industry standard was to ensure that BEST practices were being used by everyone and high quality was uniform.
If the industry standard sucks to begin with, then "we were following the industry standard" is no more a defense than "I was just following orders".
Judicial activism is what people call it when a judge calls a spade a spade and someone can't get away with what they wanted to get away with.
"The reality is more like the lenders have been stupid and made some horrible business decisions that they are paying through their nose for."
Show me a bank exec who can't make their own house payment due to sub prime loan crisis and I might feel a little sorry. Every top exec at Bear Sterns, Countrywide,Thornburg,New Century will all have nice lives.
And really isn't 'paying through the nose' supposed to be what is happening?
Under a capitalist system, isn't the risk of loss supposed to accompany the possibility of gain, so that people don't engage in stupid money making schemes, like, oh I don't know, say
LENDING MONEY TO PEOPLE WHO CLEARLY CAN'T PAY YOU BACK JUST SO YOU CAN MAKE COMMISSIONS!!!
Also, since NatWest are the ones putting themselves forth as "professionals", there's the fact that they didn't seem to do any due diligence at all....
I'd call it financial malpractice, but that's just me.
The WSJ's report on this case has statements from the borrower. Which I believe.
"I take full blame for living a lifestyle that we couldn't afford." Her family last year gave up the home, she says, which they had purchased some 20 years ago. They found themselves unable to make payments after having taken out additional debt, from National City, against the property. The lender that held the primary mortgage bought the home in a foreclosure sale.
"Under no circumstances did we intend to defraud anyone," she said. "And we signed a paper authorizing [National City] to call our employers and access our bank accounts, and they never did."
Now party A attempts to defrud party B. Party A fails to detect the fraud.
Party A attempts to enforce its contract remedy,but the party that commmits the fraud is not held to the contract, becaue they claim and the court held that party A did not act resonably in reling on fair dealing with its counterparty and thus became a party to defrauding itself.
The court has destroyed the principle of contract entirely. ANd has done so without it would seem evidence of colusion. In short the court did not like the way the bank did business and so deciced to dislove legal contract. Indeed the court found that the very fraud the Hills commited was evidence of the fact that they could and should not be trusted.
So if an honest person had made a techinal error and mistated his income by a material ammout with out intent to defraud it would be resonable to rely on it and thus the contract could be enforced. Buy as party B intened to commit fraud it was not reasonable and the contract could not be enforced.
This is why legal resoning is an oxymoron and it is not resonable to rely on contract law of property rights in the US anylonger.
"I think Tanta is definitely correct to say that the banks entered into the loan only because under the assumption of drastically and monotonically increasing land/house prices made it a safe bet. Either the FB would sell the house, and maybe make a small profot for themselves, or it would be forclosed upon for enough to cover loses. They were wrong, and lost. They are unconvincing to say they believed the lie. They were widely called liar loans back in 2005, and the loan was entered into in 2006 for crying out loud."
SO on what evidence do we conclude this? or prehaps we do not need evidence? Now given that the Hills admitted fraud and purjury,and The bank was able to impune there credability how do we conclude that the bank is not credible?
Answer becuse if we don't trust the Hills neither should the bank. But in the 2nd lien cituation is it not possible that the bank did rely on income statemts in an effort to avoid the loan failing-- that is to protect thier investment much the way a bank will extend additonal credit to a business to help avoid failure. It may not have been a wise decision,but that does not make it an act of fraud in which they were complicit.
Chrisfs writes:
Whoa, frickin whoa, some banks are going to be shaking in their shoes. I'm surprised by that ruling.
no the banks will not be hurt. The taxpayer vis FDIC will be hurt and the investors, and every honest barrower who will now make up the losses via higher rates.
"People lie in contracts all the time. When the contract goes into default, the judge looks to see if the lie would have materially affected the decision to enter into the contract. In this case, the judge rightly found that the stated income of the Hills was not the deciding factor for Nat City in proceeding the the mortgage. You cannot enter into a contract with known, or reasonably should have known, misrepresentations and expect a judge to enforce performance when you chose not to protect your own interests in the first place."
Wow so that means that there is no resonable expectation of fair dealing.
So I must assume that my counter party intends to defraud me. But if I make such an assumption is it not reckless to do business with such a person. Would a reaonable person do business with a person who commits fraud as a matter of common business pratice. What burden of proof must I offer if I fail to detect a fraud? Does my Due Dilagence protect me if it is merely consitant with common business practice( as it appears to have been in this case), or is the case that, since any resonable person would would commit a fraud sucessfully would of necessity design a scheme that would defeat all such common checks,is the mere fact that I allowed myself to be defruded evidence that I failed to detect a fraud which I would have detected or prevent had I done X for any X were X was how I later discovered the fraud after the fact.
A common business practice may not be smart and it may not be sufficent, but it can not void the obligations under contract of the other party.
Now it may be that the contract did not provide sufficent protections in this case of that existing law superceed those provisions, but gather that this is a novel outcome,and that the bank in this case was at least relying on stable law when it decided t make the loan and common buisness practice in detecting fraud.
This will do more than end stated income loans. It wiil drive banks to redlineing and other practices, They will be sued of course but those kinds of cases they can win if they find enough fraud. In fact I would spend the next few years voiding loans and filing criminal complaints.
Tata:
"The only thing that will get through to these lenders is nasty experiences like this one with Judge Tchaikovsy. I am personally less concerned with what happens to the Hills than I am with what happens to our entire economy, and I say loose lending is threatening us all and needs to stop. You are free to disagree but you are not free to claim I'm apologizing for two-bit losers like the Hills."
I amire your idealism but no they will not
They will mark it as cost of doing business and move on. As they are no longer sure of recovery in BK court they will assume fraud and file criminal charges even for minor errors. They will file documents with the court in which barowers are requred to atest under oath to the acuracy of ther documents and they have them sign wavers. Many of these measures will not hold up,but they will use them anyway. Over the years I have signed many agreements that I know can not be enforced but they are used to intimadte. They will make binding arbitration a requirement for getting a loan and will require barowers to sign statement which may be used to incriminate or impeach them later.
That is all that has happened here. And those who commit or try to commit fraud will keep right on going.
As for example the fact that credit card companies must eat the fraudeulent use of cards has not prevented fraud,and they still send out pre approved offers to make it easy to get false cards--the cost of both fraud and fraud detection,and for that matter over the top direct mail are borne by the honest customer.
Folks, this is not as complicated as some are making it.
Yes, the borrowers committed fraud. However, as we all know (or I hope we know by this point), this fraud was invited and encouraged by the lending standards in question.
And as the bank is therefore involved in soliciting fraud and its policies establish a pattern of doing so, they are unlikely to get the better side of any judgment taking this into account, where the borrower does not ALSO have a pattern of commission of fraud.
In nearly all cases, the borrower will have one fraud to his credit - falsely stating income or assets to qualify for the loan - where the bank will have hundreds and thousands of such cases on its record.
Personally, I would go even farther than the judge did and order the bank to compensate the borrowers for the borrowers' losses. The banks were the ringleaders of the fraudulent enterprise and as such enticed many people who would never have been involved in any fraud whatsoever to participate in a mortgage such as this.
Only in a case where the borrower was also involved in other types of fraud would I view the two parties' participation as equivalent. In how many cases will we find the borrowers up to their neck in fraud, as we find the banks?
dg | 05.29.08 - 6:57 pm | #
This is the kind of politics I was refering to.
We have no evidence of any bad conduct on the part of the bank. If it exists at all it was not on the blog-- but prehpas it is in the full ruling.
IN ANY CASE YOU CAN'T JUST MAKE UP FACTS EVEN IF YOU ARE A JUDGE. I ask again what evidence is there that this bank did or failed to anything.
If you do not like the current standard buisness practice,and you think that any loans conforming to such practice need to be treated in a certain way under BK law then you have an issue with the banking regulators or the legislature.
If a bank is following current business practice has blessed by the banking regulators then you can not invent the fact that they are complicit in fraud.
Now it may well be that the dept should be dischagred anyway under Bk law- but does anyone really think this case would have been decided in this way if the value of the colareal had been destroyed say by fire? Or if the fraud extended to failing to ensure the property.
There is politics afoot here and it will hurt us all for decades to come.
Know a person who voluntarily defaulted on 2 heloc loans. A $99k Nat City and a $99k eLoan Bank one.
Also these homedebtors have a primary mtg with Nat City for $540K.
They voluntarily defaulted on the Helocs July 07. Also just got a expensive leased car. How I do not know.
But what are the consequences?
The people that bend the rules GET PAID! You too can bend the rules by printing out fake paystubs w-2 w2 1099 forms using http://www.proofofemployment.com/
Buy the home car or get a huge irs tax refund just for being you!
Do what you have to do to get yours! EVERYONE ELSE DID http://www.fakepaycheckstubs.com/
Print out Fake Employment and Fake Income, Wages, 1099, w2, w-2, using your home computer printer! http://www.proofofemployment.com/
Is it just me or is this pretty huge news that must have serious consequences? Will this ruling changes the "models" od loss in use by the smaryy banks to estimates default rates on HELOC's? If it becomes known that the precedent for this is a lack of due diligence by banks the worst may not yet be over!
P.S. First??
I agree with the judge's decision. These were indeed loans based on the value of the collateral. The fact that appraisal reviews were so poor can't obfuscate that fact.
The reptilians among us never could figure out any realistic basis for recent mortgage underwriting criteria in the ever-expanding universe of "innovative" loans. I guess the judge was old enough to be a reptilian.
If very many judges take this view, we are going to start seeing many more Alt-A downgrades in the next few months.
If it becomes known that the precedent for this is a lack of due diligence by banks the worst may not yet be over!
I think it is extremely important to be clear here: this decision does NOT say the problem is solely a "lack of due diligence." In this case, the Judge did find that Nat City's due diligence was weak. But she went on to opine that even if it had not been, the very guidelines themselves--the "industry standards"--did not rise to the level of something a creditor could reasonably rely on to make a loan decision.
So you could do all the "due diligence" you want, but if it came down to processing the loan under one of these "stated income" programs, the presumption is you just made an "asset loan" or relied solely on the value of the home, not the ability or willingness or likelihood of repayment. Taken to its full implications, that means that all stated income loans would have to be treated, for accounting purposes, as "collateral dependent" loans, meaning they are basically marked to the value of the collateral without regard to any projected future cash flow. I don't think such an accounting change is going to happen without MAJOR struggles, but that is the implication of this.
Yes, that is a big major honkin' deal.
MOM, I think Judge Tchaikovsky joins you and me in the Sisterhood of the Snout.
Amazing...I have never been one to side with huge lenders...but, damn, National City is a victim here (LOL).
This stuff is wild, the Hills are the Jay Gatsbys of today.
"Moreover, the Hills, while not highly educated, were not unsophisticated."
Also, I agree with your last statement...but really were not both borrower and lender party to this. I would have cut the house in half and give each a share.
Tanta...have a great day...if the sun is out here I plan to go for a walk.
Best regards,
Judge seems to split the blame not so much between borrower and lender as between borrowing industry, borrower, and perhaps something (a tongue-lashing) left over for lender.
Tanta,
Do you know what county/state this was in? Interesting that the judge made it the responsibility of the bank to do their homework and investigate their own borrowers.
Wow- justice is served with my coffee - but how long can they try to tie this up with appeals? or can they?
Ohhh, nasty. I like the implication (because I don't own a bank or RMBSs): "If its a liar loan, and you know it is a liar loan, you can't complain when they lie!"
Tim:
"United States Bankruptcy Court, Northern District of California, Case No. A.P. 07-4106 (May 28, 2008)"
Tanta...have a great day...if the sun is out here I plan to go for a walk.
Just don't carry a slightly bent Freddie Mac umbrella and mutter to yourself. The neighbors will think you're me. And there go the property values.
Nat City gets zero sympathy for me on this one. Talk about a case of "fool me twice."
While we're on the subject of guidelines, let me mention that everyone has guidelines involving the "seasoning" of a cash-out refi. That means that if the loan being refinanced is 6-12 months old (depending on how conservative you are), then the appraised value used for the cash-out refi is the lesser of the current appraised value or the appraised value (or sales price) used in the transaction being refinanced. The whole point of such a rule is to prevent one from cashing out "vapor equity."
There is just no way on God's green earth that any sane lender would accept that kind of increase in the appraised value in just six months. In 2000 bloody six. So if NCC's guidelines said you could do a cash-out on current appraised value within six months, the guidelines themselves are stupid. It is not a question of a specific appraisal being "inflated." It is a question of how anyone can believe in that kind of appreciation in that time period. In other words, you just wrote guidelines that invite "inflated" appraisals, as you wrote guidelines that invite misrepresented income.
Bear in mind that Nat City was dealing with the increase of a HELOC it had originated six months previously. The original loan file was sitting right there in front of whoever approved the line increase. Again, this is a terrible failure of basic due diligence, but it was enabled by guidelines that allow increases to credit lines based on a new appraisal within a mere six months. You know perfectly well someone at Nat City said, well, that's the rules!
BillF,
Thanks. You know what county? And hey you wouldn't happen to live in Socal would you? I know someone that has those initials
This is the same logic that says if you dress provocatively and walk in a bad part of town, you deserve whatever you get. No legal recourse; you should have known better...
I have no objection to punishing Nat City for idiotic lending. I have an extreme objection to rewarding scum like these folks in order to do it.
And if you rely on an inflated appraisal, that's your lookout, not the borrower's.
Of course. Except the court is not making some abstract decision about whose "lookout" it is; the court is discharging the debt.
So, engage in fraud; never have to repay. Oh yeah, that's a great precedent.
Tanta
"There is just no way on God's green earth that any sane lender would accept that kind of increase in the appraised value in just six months"
Love your style Tanta. Another implication might be that the investors in National city might want to sue for negligence and the resulting decline in share price
Nemo,
Poor analogy. Start with a 'professional' walking in a bad part of town and proceed from there...
Nemo,
Mortgage brokers and Banks made tons of money selling and servicing loans. i have no pity for anyone up the chain from borrow to wall st bank. People are going to exploit cracks in the system and we need adequate oversight at the our financial institutions. That was absent at Nat city.
is sanity coming back to the housing market or is everyone just running scared?
This ends the stated income "pick up line"
You may decry this ruling as legislating from the bench. But how can 'Stated Income" ever be a viable systemic policy? It can't.
Will the last line of defense hold ?
The "too big to fail" has been back stopped by an implicit, "too big to regulate of prosectute for fraud", which to me, may be the worst of the two. If this whole mess is quietly swept under the carpet, there may not be much foundation of the system to work with. In fact, the bubble economy is built on the same foundation as Enron and Worldcom. Leverage, off-balance sheet financing, fraudulent accounting statements, absentee regulators, crooked shysters, public misstatements of fact.
We will end up bailing it out but the entire financial industry needs an enema and a cleasing exposure to the sunlight.
RE The Sisterhood of the Snout:
Yes Tanta, I would say so.
I bet the judge's scales were quivering individually as the bank advanced the argument that they had absolutely no idea that a serial cash-out refinancer was living off the "equity" in the home.
I'm glad someone is willing to point out the glaringly obvious. Having to pull 50K out of your home every six months to make ends meet is not a red flag. It's Beethoven on steroids playing a symphony on the theme of "Nearer My God To Thee".
But what still gets me is the "industry standard" behind the idea of stated-income loans - that the borrower is capable of underwriting their own mortgage. Which is BS, and it's time someone did comment on that.
I guess we'd better get prepared for the tidal wave of shocked articles about creditors freezing HELOCs. Gretchen's probably close to an aneurysm.
This is the same logic that says if you dress provocatively and walk in a bad part of town, you deserve whatever you get. No legal recourse; you should have known better...
No, it isn't the same logic at all.
The Judge is applying a clear legal standard of "reasonable reliance."
The bank wrote guidelines that said that it would rely on the unverified representations of people who have every incentive to lie. It did so because it really relied not on the representations, but on the value of the collateral.
Well, the collateral ended up having no value to the second lien holder. So they can't now claim that they relied on a promise to repay the loan in cash. You cannot have it both ways.
Nemo: It is not as if the lender went walking around in the bad part of town in a thong after midnight. It is more like they advertised "Ask me about free money!", held open a bag of the stuff, said, "Take what you need--you do have a good job, right?", and invited the takers back again.
The important thing to remember is that Nat City did this with OPM. Nat City has the responsibility to allocate loans diligently, since the money wasn't theirs to scatter to the winds, but theirs to invest prudently. The Hills are not without some (small) punishment either--they are BK or moving toward it. But the big story is the big lender with the big pockets full of other people's big money. Don't forget that, please.
I'm really glad to see this decision come out. I have no vested interest in the matter, but it's nice to finally see someone the corporate world held responsible for its share of the behavior it explicitly encourages in order to generate new business.
The next logical step is to void credit card debt unless the card company can show reasonable grounds that the cardholder understood the terms of the agreement, with all its 5-point font and legalese.
Business should be based on the honest provision of goods and services, not on what is essentially predation upon the economically illiterate.
Tim, the home in question was in El Sobrante, CA which is Contra Costa County.
No, I am not in SoCal. Wrong coast.
BillF
CCC huh. Figures prices are dropping like a rock there. thanks.
BillF, you're too nice for a right-coaster.
Give a man a fact, he leaves you alone for five minutes. Teach a man to Google, he leaves you alone for the rest of his life.
Dg:
The next logical step is to void credit card debt unless the card company can show reasonable grounds that the cardholder understood the terms of the agreement, with all its 5-point font and legalese.
You are right, but it ain't gonna happen anytime soon. That would undermine the entire economy to the tune of $10 Trillion/year (70% of our GDP is consumer activity), and justice will usually take a second seat to the whole economy.
Tanta said,
"Give a man a fact, he leaves you alone for five minutes. Teach a man to Google, he leaves you alone for the rest of his life."
LOL.
At the foreclosure sale in April 2007, the first lien lender bought the house at auction for $450,000, apparently the amount of its first lien. I'm probably a little unclear on the details, but this seems to me to indicate that City National thought that there would be so little equity left after satisfying the first that they didn't bother to put in a larger bid. Because if they thought that they could sell the house for $550,000 it would have made sense to bid $450,100 and try to sell the REO themselves. Their actions when spending their own money speak louder than appraisals.
If you want an analogy to crime, it's like a prosecutor relying on prison snitch testimony to put someone in jail when there is no other evidence.
The snitch has nothing to lose and everything to gain by telling the prosecutor what he wants to hear. No responsible prosecutor would go to court relying on nothing other than bought perjury.
Their actions when spending their own money speak louder than appraisals
Yup.
Tim --
Mortgage brokers and Banks made tons of money selling and servicing loans. i have no pity for anyone up the chain from borrow to wall st bank. People are going to exploit cracks in the system and we need adequate oversight at the our financial institutions. That was absent at Nat city.
Yes, yes, YES. I have no sympathy for the bank. But in this case, the cost of punishing them is a court-ordered transfer of wealth to these lying scumbags. That cost is too high, in my view.
Tanta --
So they can't now claim that they relied on a promise to repay the loan in cash. You cannot have it both ways.
Yeah, I understand the logic of the decision. I am objecting to the outcome, which is to reward these folks' deliberate fraud.
The judge is saying, "Sure they lied, but you should not have believed those lies, so I am nullifying the contract." Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!"
I would feel better if these folks were being prosecuted and would see jail time. Rewarding their fraud just to punish Nat City may be "good" law; I do not know since I am not a lawyer. But it is a very unhealthy outcome for society, IMO.
What a terrible precedent.
Precedent. What precedent is set here? Are other bankruptcy courts in other jurisdictions obliged to follow it? Can Nat City appeal, saying that a bankruptcy court in, say, Nevada, ruled differently on the same issues, so an appeals court has to resolve the discrepancy? To what court do you appeal in the bankruptcy system, anyway?
Anyone?
Asked the same thing upthread, but yes- the appeals thing worries me. The industry is going to fight like hell if it can.
And Nemo, I am not sure how you get to taxpayers holding the bag on this one.
The judge is saying, "Sure they lied, but you should not have believed those lies, so I am nullifying the contract."
No, that is not what she is saying.
She is saying, "Nat City gambled on real estate appreciation. It lost the bet."
It is no part of the "contract" that real estate must always appreciate. That is the force of the finding that the loan was "collateral dependent." If you are not "betting" on the borrowers' ability to repay, but rather "betting" on Mr. RE Market, then you deal with what Mr. RE Market does.
The Hills lost the home and are having all their toys taken away from them in Chapter 7. They are hardly getting off scot-free. You want to "punish" these liars so much that you can't see that Nat City created the problem in the first place: it should have been obvious to a child that this application was based on misrepresentations. All NCC had to do was say "no" and the problem would not have arisen.
I have no more sympathy for the Hills than the Judge does, but that's why I would have not just denied their loan application to start with, but would never have written lending guidelines that allowed it to cross my desk in the first place. All NCC had to do was ask for last month's paystub from Mr. Hill--who is a wage-earner, for God's sake--and the whole thing would never have arisen.
Nemo:
Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!"
That is exactly what happens when courts apply the doctrine of caveat emptor. Two hundred years of precedent, of you want to get picky about it...
CR, I think one thing most of the people here are missing is that the 'industry standards' used to underwrite this loan moved it into a dirrerent CLASS of loan: "In fact, the minimal verification required by an income stated loan, as established by the Guidelines, suggests that this type of loan is essentially an asset based loan".
As "asset based" loans are something we do, I can assure you that you better know your assets because there is no way to get anything else. We usually loan 50% LTV and require that we hold title until the thing is paid in full. This is something the bank's legal dept. should have caught immediately.
Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!" The legal term for that is puffery. Things like "The greatest car you've ever seen," are NOT regarded as false advertising because no reasonable person would make a decision based on them.
The Hills claimed that they did not misrepresent their income on the April loan, and that they had signed the application without reading it.
So they lied to the court about a material fact? Is that not perjury?
And Nemo, I am not sure how you get to taxpayers holding the bag on this one.
It is not about taxpayers; it is about rewarding people for committing fraud.
Forget Nat City for a second. Suppose you and I entered into a contract, but I deliberately lied when I signed it. Then suppose a court nullifies the contract on the grounds that you should have known better than to trust me, and you are left holding the bag. How would you feel about that decision?
I do not care what the contract says or what kind of person you are; that result would be both unfair and unjust. What message would it send to me and to people like me?
In the single-minded desire to punish predatory lenders, you folks are praising decisions that will have very unfortunate long-term consequences, in my opinion. Rewarding fraud is not in your best interest.
All that will happen is that the lenders will go to Congress and get the Congress Critters all excited about campaign contributions. Then a new bankruptcy law called "The Citizens Patriotic Relief Act of 2008" will pass mandating that debtors are responsible for everything and allowing creditors to take children, pets and body parts to satisfy debt.
gdp- .9%
No recession! The worst is over. Yeehaaaw. Little weaker than 1%+ expected. Negative when you factor in inflation. I was thinking it would be at or below .6% the preliminary number.
Suppose you and I entered into a contract, but I deliberately lied when I signed it.
It would depend on whether such reliance is reasonable or not.
Suppose you and I entered into a contract that involved you making the representation that you would perform your obligations thereunder when Jesus returns to Earth to punish the wicked; that you have reason to believe that this will occur next week, and that therefore I may rely on your performance.
It maketh no difference that you were lying out of your ass. The court would find that I had no basis to claim that I "reasonably relied" on your representations.
You can't write any old stupid contract you want based on any old patently ridiculous representations and then claim to a judge that you should be paid back under the "reasonable reliance" standard.
And you bloody well don't get a federal banking charter if you are the sort who finds it reasonable to rely on the premise that people never lie in order to get loans. We have a higher standard than that. The Judge is reminding us of that.
Nemo:
The issue of the lie is did the creditor reasonably know it was a lie or ignored lying in order to make the loan knowing if the default happened they get an appreciating asset to covert the loan and its profit with a bit of profit off of the sale to boot.
In short they allowed or encouraged a lie to make a profit knowing they could go to court and claim their due. Or heads they win, tails they win.
Tanta --
It is no part of the "contract" that real estate must always appreciate. That is the force of the finding that the loan was "collateral dependent."
But the Hills signed a legal document asserting their ability to pay! So you cannot get to "the loan was collateral dependent" except via "you should not have believed them".
This decision implies that if you sign a contract where some clause is a deliberate lie, but the counterparty "should not" have believed that lie, then the court will act as if the clause was never there.
All NCC had to do was ask for last month's paystub from Mr. Hill--who is a wage-earner, for God's sake--and the whole thing would never have arisen.
Sure. But is it really a good idea for courts to be setting underwriting standards retroactively?
And yeah, the Hills are getting punished, but no more than someone in the same situation who did not commit fraud. I have a problem with that.
"Nat City gambled on real estate appreciation. It lost the bet."
Exactly. If the value of the house was increasing and the home was foreclosed why wouldn't this be considered predatory? The lender made the loan without proper condsideration as to whether the loan would be repaid. Now that the value is decreasing the borrower is ruthless.
"I have no sympathy for the bank. But in this case, the cost of punishing them is a court-ordered transfer of wealth to these lying scumbags."
Nemo, if you look at it that way, EVERY bankruptcy discharge is a "transfer of wealth" to the discharging borrower. The possibility of bankruptcy is included in pricing and underwriting.
In exchange for discharging their debts the debtors have to give up all their assets to the creditors and make their finances public record. What would you do instead, revive debtors prisons? How would the economy fare if you put people in the clink for missing a payment?
"To what court do you appeal in the bankruptcy system, anyway?"
Queequeg (and Alo), the appeal will be to the 9th circuit bankruptcy appellate panel, a court of bankruptcy judges from other districts in the 9th circuit. The panel won't get to decide whether lying scumbags should be punished, only whether National City had "reasonable reliance" on the debtor's financial statement, because that is what the Bankruptcy Code requires a lender to show if it doesn't want the debt discharged.
And you bloody well don't get a federal banking charter if you are the sort who finds it reasonable to rely on the premise that people never lie in order to get loans.
I would only add to this a quote I remember reading from Ric Edelman many years ago: "A mortgage is not a loan against your house. A mortgage is a loan against your income."
The only reason mortgages carry lower interest rates than credit cards is that they are secured by collateral - a class of collateral with a decades-long history of price appreciation.
If National City had issued a credit card with a $250,000 limit to the Hills - based on nothing more than their writing "$190,600" in that little "Income" box on the application - instead of a HELOC, would you still be arguing that NCC should be entitled to collect their money even in the event of the Hills' bankruptcy?
Or would you be laughing, as I would, at the sheer naivete of a company that would hand over a quarter-million dollars based on nothing more than somebody's say-so?
Why can't the IRS go after The Hills for the back taxes on the inflated income shown on the loan docs?
why can't the FBI prosecute the borrors for making false statements on a loan doc?
Mr and Mrs Hill could get 30 years for loan fraud and/or pay off all the back taxes plus penalties and interest.
But the Hills signed a legal document asserting their ability to pay!
Yes! And the Judge is saying that relying on simple assertions with no verification when you are lending hundreds of thousands of dollars is not reasonable. And THAT IS THE LEGAL STANDARD for relief that the bank was relying on when it asked to have the debt considered non-dischargeable.
Look, if NCC's guidelines involved verification of income, and the Hills had submitted professional-quality forged documents and had an accomplice to answer a phone verification credibly and had done this consistently in both applications, I am sure the judge would have ruled in NCC's favor. Because she would have concluded that NCC's reliance on these documents was "reasonable." The creditor does not have to be omniscient, merely reasonably diligent.
On the other hand, if it had been a verified-income program and the Hills had submitted documents that were made out of letters cut out of a newspaper and held together with visible white-out, the Judge would have ruled that this, too, was not something you reasonably rely on.
Nemo, Nemo, Nemo. Do not come around skittering around the reptilian feet with talk about "bad precedents" relating to this decision.
We are slow, but our jaws are tooth-filled and inexorable.
These people aren't being rewarded for fraud. They lost their house. I guess they had a good time for a while, but eventually reality came knockin' in the form of a sheriff.
If you are worried about taxpayer money, figure out how much it would cost the taxpayers to put all the stated-income borrowers in jail for six months each. Come on now, let's try to remain in the realm of the possible.
Regarding the claim that Nat City was somehow injured here:
The debt was going to be discharged in bankruptcy. The only argument Nat City had against that was to say they were defrauded. The judge threw that out on the grounds that the borrower's inflation of income was not material information on this loan application. The judge is obviously correct. There is no way Nat City relied on that statement of income to make the loan. NO WAY!!
You could make an argument that Nat City was relying on the belief that the borrowers were lying about their income and that Nat City could therefore hold a legal club over their heads which would make a second lien to collect a debt which was otherwise nonsecured. However, that would make Nat City a participant in multiple counts of conspiracy to commit federal crimes, so I am sure no one on this blog wishes to suggest in any way that this is the case. I certainly am not suggesting such a thing. And certainly the esteemed judge would not make such an unfounded accusation.
This has nothing to do with Nat City wandering into the bad part of town, getting assaulted and then abused again in court.
Nat City owned the town, paved the streets, and chose the occupants, then invited them to a big game of liars poker. It is hardly fair for Nat City then to call the cops when Nat City ended up losing.
You might want to look up the following statutes:
18 U.S.C. § 1014
18 U.S.C. § 1341
18 U.S.C. § 1344
collateral dependent" loans, meaning they are basically marked to the value of the collateral without regard to any projected future cash flow.
Tanta | 05.29.08 - 7:36 am
Minor point. The loans will still be marked to projected cash flows. However, the presumed cash flow may be the projected proceeds to the note holder on the asset sale. The accounting principle will still hold, but the value of the note will not.
Bankruptcy Lawyer --
Nemo, if you look at it that way, EVERY bankruptcy discharge is a "transfer of wealth" to the discharging borrower.
No, it is not. The purpose of bankruptcy is to protect the interests of the lenders by restructuring debt in such a way that those lenders can get back something instead of nothing. Debtors' prisons do not help lenders. Giving borrowers breathing room to get back on their feet does.
Here, a particular debt is being discharged on the grounds that the lender should not have relied on the deliberate lies made by the borrower. That is a transfer of wealth.
Again, imagine a case identical in every way, but where the borrowers did not deliberately attempt to defraud. Is it fair or just for those borrowers to get the same outcome?
The loans will still be marked to projected cash flows.
You're right, I should have said "projected future cash flows from repayment" as opposed to asset liquidation.
WHO HAS THE GREATEST EXPOSURE TO STATED INCOME LOANS OR SECURITIES TIED TO STATED INCOME?
Anyone?
Good q. urbanDigs - and thanks Bankruptcy Lawyer (now, do you think the industry has a shot at overturning?)
Nemo, the purpose of the bankruptcy process isn't always to protect lenders (unless they own the courts along with the town and the streets). It's to protect them if they deserve protecting. In this case, I am pretty sure they gift-wrapped a big package of nothing and pawned it off on the securites industry as a shiny, expensive something. Which brings us back to UrbanDigs's fine query...
Nemo, I disagree. Bankrupcy protection has two primary goals IMHO. First, it prevents the creation of a class of debt-peons, trapped forever in thrall to their creditors whether from fecklessness or misfortune. Second, it helps encourage debtors to start climbing out of their hole earlier, because it discourages lenders from giving out new shovels to people already in the hole.
This decision implies that if you sign a contract where some clause is a deliberate lie, but the counterparty "should not" have believed that lie, then the court will act as if the clause was never there.
Say you're walking down the street and a guy in a beat up car with no plates pulls up next to you, pops the trunk, and offers to sell you a $10,000 widget (that you really want) for $20.00. He insists it isn't stolen.
Should you be allowed to buy the widget and keep it without fear of either criminal charges or having to give it up?
On this application, six months later, the Hills' annual income was stated as $190,800
Seems like they were smart enough to change their income to get the ratios right(31% increase).
While it is nice to see this small victory. The banks hold the ultimate trump card, his name is Bernanke, and he will make sure that at the end of the day....it's not the banks that are holding the bag.
My insomnia is waning, so I am going back to bed.
Thanks to everybody for the back and forth; it has been interesting. The legal decision may well have been right -- "reasonable reliance" does seem a stretch -- but I still think in this particular instance "the law is a ass".
What lesson have the Hills taken away from this decision, I wonder?
G'day.
re: urbandigs - who has the greatest exposure to this toxic garbage? Hard to say for sure, but this would seem to give a clue:
Mish's Global Economic Trend Analysis: Alice-in-Wonderland Accounting
JP Morgan, Citibank, Bank of America, Merrill Lynch, Goldman Sachs, Bear Stearns, Morgan Stanley, and Lehman Brothers.
Pretty much a rogues' gallery of contempt for due diligence and risk transparency.
"You may decry this ruling as legislating from the bench."
"legislating from the bench".
Oh my!
Justice interprets law as it apply to a particular case. If the case reveal fundamental flaws in the law, is everyone going to wait for the legislator to correct the flaws?
Justice must be served in a timely manner. That is why we have judges.
In this case, Tanta is dead on. The guidelines were stupid beyond a reasonable doubt, and following them is no excuse to come crying to the judge that the debtor is a badass.
If the effect of the ruling appears to "reward" the debtors, well, it just goes on to prove that, at times, life can and do suck.
The judges are being reduced to merely middle class by the same set of criminal bankers, so they are becoming more and more sympathetic to the plight of average people in some cases.
Tanta,
I wasn't trying to be a weenie with a mechanical pencil. What I meant was the accounting change is a "Change in Estimate" and is not a major leap. This issue will not cause restatements. Many of the other topics we discuss should cause restatements, but don't for some non-GAAP reason.
Damn, back to work for me..nice view of the mall today.
Nemo: "No, it is not. The purpose of bankruptcy is to protect the interests of the lenders by restructuring debt in such a way that those lenders can get back something instead of nothing. Debtors' prisons do not help lenders. Giving borrowers breathing room to get back on their feet does."
This comment reflects a fundamental misunderstanding of consumer bankruptcy, where the vast majority of cases result in all debts being discharged with a minimal (
One of my favorite quotes by Judge Wood in the Milken case was that (paraphrasing) "just because they THOUGHT what they were doing was illegal, didn't make it so."
(remember everybody going on about how since they were meeting in dark places and exchanging cash they HAD to be doing something illegal?)
Here, just because the couple THOUGHT that lying about their income was getting them the loan, the judge is saying that the structure of the loan dictates that the house was the only thing that mattered.
Hopefully, Nemo, this helps. What I find heartening is that there is some justice beginning to creep back into the system. Since most Americans have applied for a loan at some point, they identify with the borrowers and are quick to point out and judge the borrowers harshly for any mistakes or lapses in judgement. We aren't nearly as quick to demand that the crooks that perpetrated this mess, at a HUMONGOUS cost to society, do the perp walk and spend some time behind bars.
Short of that, at least it ought to cost them.
Nemo: "No, it is not. The purpose of bankruptcy is to protect the interests of the lenders by restructuring debt in such a way that those lenders can get back something instead of nothing. Debtors' prisons do not help lenders. Giving borrowers breathing room to get back on their feet does."
This comment reflects a fundamental misunderstanding of consumer bankruptcy, where the vast majority of cases result in all debts being discharged with a minimal(less than 3% of debts overall) distribution to creditors.
Nemo: "Here, a particular debt is being discharged on the grounds that the lender should not have relied on the deliberate lies made by the borrower. That is a transfer of wealth."
The transfer of wealth takes place when a lender gives a borrower money that the borrower can't repay. Any debt will be discharged in bankruptcy unless the creditor can show an exception to discharge (such as its reasonable reliance on a false financial statement). Whether a borrower SHOULD repay is irrelevant if they can't. Even if National City were allowed to kill the Hills and sell all four of their kidneys it would lose most of the HELOC advance after paying the surgeons.
Nemo: "Again, imagine a case identical in every way, but where the borrowers did not deliberately attempt to defraud. Is it fair or just for those borrowers to get the same outcome?"
In this case, yes. If you change the Hills' situation in only one aspect -- have the bank verify the income but be given false documents -- the outcome would be different.
"Since most Americans have applied for a loan at some point, they identify with the borrowers and are quick to point out and judge the borrowers harshly for any mistakes or lapses in judgement. We aren't nearly as quick to demand that the crooks that perpetrated this mess, at a HUMONGOUS cost to society, do the perp walk and spend some time behind bars."
Well put. Thankfully, the judge wasn't the distractable type.
Thread music: 1812 Overture?
If this holds, each level of the securitization chain will argue that the level(s) above it exhibited "reckless disregard" in creating and passing-on loan guidelines and then "unreasonably relied" on the data collected to demonstrate compliance with those guidelines!
This would be the legal deathblow to stated and low-doc loans in the US.
UrbanDigs - I think a small municipality in Norway has most of the alt-a exposure.
This whole issue over borrower responsibility for stated income loans is moot. Even if Nat City had won the case, and had their lien upheld, it's not as if they would have been able to recover anything. The house isn't worth enough to cover the lien (in addition to 1st mortgage), and in all likelihood the borrower doesn't have sufficient assets or income to make significant payments on their debt.
The real mystery here is why Nat City even bothered going through the expense of fighting this issue in court.
I love this meme that people who go bankrupt are somehow receiving some "transfer of wealth" or other free lunch. WTF? They got nothing! They are homeless, their assets (if any) are gone and anything they don't own outright has been repossessed. Yeah there's been a transfer of wealth allright, AWAY from these poor idiots.
Really, now. I've never missed a payment on anything in my entire life, but even I am not dumb enough to beg so loudly to have my cross exchanged for someone else's. If you think bankruptcy is such a walk in the park go for it- don't go to work this morning and stop paying your bills today and join the party.
Bankruptcy and bad credit are a special hell- and they're working harder and harder every day to make it more so. In many places it already gets you on a blacklist as far as certain jobs are concerned. Want more? I'd like to see how you feel when you can't get a job because you couldn't afford your mother's medical bills.
Shnaps writes:
Thread music: 1812 Overture?
Shnaps | Homepage | 05.29.08 - 9:19 am | #
My vote is for Wagner's "The Ride of the Valkyries" replete with Robert Duvall saying, "
I love the scent of SISA loans burning in the morning..."
I don't pretend to understand the minutiae of BK law or mortgage underwriting, but I have a pretty good feel for politics, and Vader is 100% correct. There's too much money at stake for too many powerful financial institutions, and they'll wave their big boxes of money under the noses of enough Representatives and Senators, eventually getting a bill through Congress that will mitigate their situation, even if this decision is upheld on appeal. Speaking of which, isn't it likely this will be appealed all the way to the Supreme Court?
Wagner? This is clearly a Tchaikovsky thread, Mike!
--
Tanta: I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan--knowing perfectly well that it is doing so--while shifting responsibility onto the borrower, who is the one "stating" the income and--in theory, at least--therefore liable for the misrepresentation.
Thank you, Tanta, for exposing Bankrupters and Fraudsters for what they really are Crooks. There efforts to bankrupt and defraud American People were deliberate. No?
These people want to inflict death-by-thousand-cuts on the American econo-political system. They are succeeding.
Jas
Thanks Shnaps! Yep, thats got to be it.
Seriously though, Im thinking WAMU, WFC, WB...and CFC of course.
I don't see this as big deal. It is not real estate related as the Security interest had been previously foreclosed off. Although at some prior time it was a HELCO, it was now just a personal line of credit subject to Bankruptcy law. Banks rarely even bother to oppose such a discharge.
A problem I have with this is that without the misrepresentation, they wouldn't have received the loan. It seems one should be held somewhat accountable for misrepresenting income to the tune of almost 3X!
Summary: National City attempts a "we were just following guidelines" defense -- didn't work.
The real mystery here is why Nat City even bothered going through the expense of fighting this issue in court.
For two reasons, I suspect. One is that in dealing with the foreclosure someone who couldn't be shut up at NCC noticed the fraud. Something had to be seen to be done about it, no doubt to make the regulators happy.
Two, heretofore, at least, kicking out a motion to a BK court to have the debt non-dischargeable was a pretty easy thing to do, and I suspect NCC bet that the judge would rubber-stamp it. Tough luck for NCC that she dragged everybody in to testify, made them give her their lending guidelines, and then read them.
The last thing I think NCC counted on was these people having any money at any time in the future to pay the judgment with, although they'd happily have settled it for a couple grand at some point. I suspect they wanted to show their regulators that they are 'cracking down' on fraud.
Thanks Tanta, maybe the criminals will get it in the end.
jo6pac
The race to the bottom continues.
@dg,
"Business should be based on the honest provision of goods and services, not on what is essentially predation upon the economically illiterate."
Agree 100% with the 1st statement; alas, i must take exception with the 2nd part alluding to illiteracy.
If there is one thing that the author of "Gotcha Capitalism" has made abundantly clear, it is the financial industry relentless pursuit of maximizing the confusion against the consumer. Some big players (not limited to the financial sector) sponsored clinical trials (!!) to test which kind of forms and invoices induce the most confusion and repulsion in the subject's mind to make the experience so discomforting with the goal of preventing the consumer to analyze clearly what's in it.
I'll bet half of my universe this is legal just because it isn't specifically prohibited by law. But it sure is far from providing quality services at a reasonable cost.
It is also the kind of behavior that will (not "may", "will") invite a zealous regulatory body to start micromanaging businesses 'til they cry uncle.
OT: Fisher's speech - a must read.
Storms on the Horizon - Richard Fisher Speeches - News & Events - FRB Dallas
Anyone have a action figure for this guy?
wow.
Francois,
In one of my first jobs, I sorted out the quarterly statements from Wall St. firms and rearranged the data into a readable format for clients. One critical piece of information that was not displayed and had to be calculated was the gain or loss on prior quarter's investment. The much more readable (but still crappy) statements available today are a result of forced legislation.
while I do like my classical...i must say this movement by Tchaikovsky is the sweetest of them all. I believe this will soon be veiwed and reviewed by the crowd on Broadway, and touring as the nations number one opera/musical and quickly be more recognizable than Harrison Ford and his Crystal Skull....
two thumbs up!
MoM, you know how those articulate rants and writings of yours and quick draw on the case law does turn me on to such extreme!
Here's the gist of it: the lender was stupid, the borrower was dishonest. The decision seems to say that punishing stupidity should have higher priority than punishing dishonesty.
Oh yeah, that's a great precedent.
lama - how many jobs have you had, man? You are, like, the Forrest Gump of accounting.
I just heard someone on CNBC describe all HELOCs as unsecured loans. Ouch!
Thread music: 1812 Overture?
How 'bout "The Nutcracker"?
UrbanDigs - I'm only half-joking. The point is, the derivitive securities of Alt-A mortgages are spread literally all over the world, and it's impossible to track who is holding which bonds at the moment.
Also, as far as the on-balance-sheet stuff, keep in mind that not all ALT-doc is created equal. I worked with one lender who had 27 different codes for various reduced-doc programs.
Sigh. Every time a legal issue comes up, we once again meet the meme that the law is, you know, whatever you think.
You don't hale someone into court on the basis of unsympathetic behavior. You do so on a specific "cause of action"--for negligence, wrongful death, intentional infliction of emotional harm, whatever. Each cause of action requires that you prove specific "elements," which vary according to the claim. You may need to prove intent, or duty, or failure to meet a standard of care, or whatever, all depending on the "rules" for your specific cause of action. And you need to prove every element to succeed--not just a couple of them.
Here, NC argued the second lien should be excused from discharge under Ch 7 bankruptcy. One of the elements it had to prove was fraudulent misrepresentation; that was fine. I imagine it had no problem proving damages. But it also had to prove another element: reasonable reliance. It didn't. So its claim failed--as it should have.
I'm sure some commenters would prefer a judicial system in which you were found guilty or not guilty, liable or not liable, based on whether some random Internet poster found you sympathetic. Until they found themselves in the dock, of course.
Tchaikovsky pens "The Nutcracter." Sweet.
Okay, stated income was acceptable but stated asset valuation was assessed by a formal appraisal and the lender tried to assert the loan was not asset based? GMAFB.
Lawyers full employment act of 2008.
just like to toss this into the mix, sun king is picking a landslide
Murdoch predicts landslide for US Democrats - US Election - smh.com.au
One question - anyone - does this ruling overturn or materially change California's non-recourse status?
I ask that because by understanding was Cali was non-recourse for first loans but fully recourse for seconds, HELOCs, etc.
Also - to Nemo, eh & others whining about the dishonest borrowers 'winning' - they won nothing. Discharging debt without out assets backing them up just means the Hills walk with nothing... as opposed to having the court reattach debt they couldn't repay anyway. Something about stones & blood comes to mind.
In many respects Nat City should be glad they 'lost' the ruling - it will cost them less to write off now (due to the ruling) what they never would have collected anyway.
Also this ruling DOES improve system wide 'moral hazard' - not on the part of loser borrowers like Hills (there will always be grifters & cheats) but rather at the 'control points' where it really matters: at the banks.
Lastly - I really am interested in learning from a lawyer who has seen these kinds of cases go through appeal (1) likely out come? (2) how long will it take the pig to pass through the python?
Thanks Tanta - outstanding way to start the day.
eh,
ehhhhh, I wouldn't be so quick to assign the benign characterization of the companies as "stupid". Crazy like a fox may be closer, only this time they may have been too crazy too near a TBD legal edge. Whoops.
awgee writes:
I just heard someone on CNBC describe all HELOCs as unsecured loans. Ouch!
awgee | 05.29.08 - 10:17 am | #
In fact or de facto? I'd say these loans were 'unsecured' no matter how you cut it - once property values started declining.
9/11 changed everything--logical rules are for fools. The judge should be considered for higher office.
One question - anyone - does this ruling overturn or materially change California's non-recourse status?
I am of course only a jailhouse lawyer, but . . . it's the net, and as Markel observed we've all passed that bar.
This will not change the recourse status of any loan in any state. However, it would not surprise me to see judges applying a similar standard to a lender's motion for deficiency judgment, wherever and whenever they are allowed to ask for one. If the basis for the deficiency request is that the borrower cashed out and ran, for instance--never intended to repay the loan or make a good faith effort to sell the property without a loss--then a lender could get caught up in having to demonstrate that it made reasonable efforts to establish willingness and ability to repay in the first place.
I say this as someone who has never actually asked for a deficiency judgment except in cases where I believed the borrower committed fraud or willfully damaged the property. So in my experience--in a limited number of states, too, to be sure--asking for a deficiency often involves allegations that the borrower was the badass. Therefore the question of the lender's underwriting diligence and--crucially--the reasonableness of the original appraisal--is very relevant to deficiency judgments.
BTW - this same sort of 'logic' should be applied to banks offering credit card debt under the 'new' BK regime - if the lenders didn't reasonably vet the borrower (blind offer via mail etc.) they really shouldn't complain or be surprised if they get stiffed.
My understanding is the last BK 'reform bill' made it easier for the banks to reattach CC debt and as a result has reduced system wide moral hazard because the silly dears think they'll actually get paid - lol. More blood from stones.
The folks handing out the money have the most skin in the game - they need to start acting like it. If it takes BK judges to remind them - so be it.
dryfly,
That would mean that two parties would each have to be accountable for their own actions...
what are you suggesting....
Damn it man, straighten up
In short, while the Court found that the Hills knowingly made false representations to the lender, the lender's claim that it "reasonably relied" on these representations doesn't hold water, because "stated income guidelines" are not reasonable things to rely on.
it's not really clear to me that this decision would have been the same without the presence of the blatant "red flag" ignoring. in other words, if there were no "red flag" present here, would the judge still have been able to say that Nat City didn't rely on the borrower's income to make the loan, just based on the guidelines?
Yes, it's not a simple case of lying borrower-stupid lender. This judge determined that the Bank was reckless enough that they were, in effect, complicit in the fraud.
...as opposed to having the court reattach debt they couldn't repay anyway.
What, neither of them will ever work again?
Personally, I think there ought to be a way for the court to make a finding that the borrower committed fraud, and make that fact available in his/her credit report for the next 15 years.
cd
Arguably, the guidelines were to protect Nat City from those that they later sold the debt to. (whether as individual mortgages or as bonds) "Don't sue us, WE TOLD YOU that all we did was write down whatever crazy shit the borrower told us."
Circling the Drain writes:
Personally, I think there ought to be a way for the court to make a finding that the borrower committed fraud, and make that fact available in his/her credit report for the next 15 years.
Personally, I think there ought to be a way for the court to make a finding that the lender was complicit in fraud, and make that fact available in their credit report for the next 15 years.
What, neither of them will ever work again? Well there's no reason to believe that they've ever had incomes that would support payments on that amount of debt.
"The no-good, the bad, and the ugly"
(cue - that spaghetti western sound track)
in other words, if there were no "red flag" present here, would the judge still have been able to say that Nat City didn't rely on the borrower's income to make the loan, just based on the guidelines?
I think it might have been a bit harder to make that case, but she might have done so. Of course I can't say for sure.
It's like RacerX's observation the other day on the due dilly thread that in many cases it seems as if the "stated income" guidelines were written precisely to hamstring due diligence, not that there wasn't enough due diligence on the loans.
I didn't quote the entire document--I wish it were online so I could link to it--but one of the issues was that Nat City's guidelines required verification of employment (but not income). They did manage to obtain a CPA Letter for Mrs. Hill verifying that she had a business. (This is a typical way of verifying self-employment.) Now, there was a problem that the letter was not signed by the CPA on whose letterhead it appeared. That would surely be a "red flag." NCC did indeed independently verify that the CPA firm was legit. And there is no dispute that Mrs. Hill really had a business--it just made about $26K a year.
But if you think about it, if you can go to all the trouble to get a CPA to write a letter verifying the business's existence, and if you can go to the further trouble of verifying the CPA's existence, why don't you just have Mrs. Hill sign a 4506 and get tax return transcripts in 24 hours for $8? The whole argument that "stated income" saves time and money and is all efficient and shit really breaks down here.
I think you can make a compelling case that such guidelines, in and of themselves, serve to "appear" to be due diligence while obscuring the fact that the lender is going out of its way NOT to know what the income is. Imagine having someone's CPA on the phone and not bothering to ask how much the business grosses! (I bet it didn't gross the income she claimed, let alone net it.)
Similarly, the wage-earner income was subject to this "reasonableness" test where you go out on the internet and use third-party vendors who supply "average" income ranges for various job categories, locations, etc. Well that's more trouble than just asking for at glancing at last month's paystub!
I have indeed myself argued for years that these elaborate "reasonableness test" parts of everyone's guidelines are just plain incriminating. You either believe in stated income or you don't; all this back-room fumbling around proves is that you are capable of verifying income but you don't want to.
Well there's no reason to believe that they've ever had incomes that would support payments on that amount of debt.
So I guess the bigger the fraud the more likely you are to get away with it?
Oh yeah, that's a great precedent.
It is interesting to note the near-universal opinion that the Hills, the borrowers, should get no sympathy in this mess. And in a strictly legal sense, such as the judge has rendered here, that is as it should be. But one aspect of our economy looms over the bankruptcy problem that, as far as I can tell, hasn't been addressed at all in this thread: health insurance. It may be slightly off-topic, but many, if not most bankruptcies are caused by health problems and the way health insurance companies deny claims and drop coverage. If your child, wife, or father loses coverage and needs expensive care to survive, you will lie on a liar loan. You might even rob banks at gunpoint--you just never know until you get there. This may or may not be the case with the Hills--they blew through a lot of money. But it would certainly seem to be the case in many bankruptcies. We just don't know what they spent the money on, and even if they came by it by dishonest means, we don't know whether it was ill-spent. For the lender to make scads of cash on the front end of a loan, and to rely on its ability to eviscerate borrowers through litigation if it doesn't work out, demonstrates for me a callous disregard for risk, resonableness, and fiduciary responsibility. That such reliances are "industry standard" makes absolutely no difference, especially if industry standards are so completely disengaged from anything that makes sense. Let's face it: the industry lost their heads. They became so indifferent to reality that they went off a cliff "because everyone else was doing it." You can put anything in a contract, but when it comes to litigation, if a judge rules any or all aspects of the contract to be invalid, huge swaths of the contract can, and in this case, did become unenforceable. This ruling makes a lot of sense.
If very many judges take this view, we are going to start seeing many more Alt-A downgrades in the next few months.
You're making an assumption that there will be Alt-As that still haven't been downgraded by that time.
Plus there's overcollateralization, and then there's overcollateralization based on the ability to squeeze blood from a turnip. I think most of the (non-bugged, snicker) ratings models were FUBARed because they assumed prices would always go up, not because they figured that they could get a pile of cash from people who had gone BK. Though maybe I'm giving the rating agencies too much credit.
If this decision means that HELOCs would have to be accounted for differently, then this'll be appealed until the end of time.
I think you can make a compelling case that such guidelines, in and of themselves, serve to "appear" to be due diligence while obscuring the fact that the lender is going out of its way NOT to know what the income is.
oh i agree the case can still be made, i'm just wondering if the judge would have done it. there's no way to know, obviously, but i'd like to see it.
The judge is saying, "Sure they lied, but you should not have believed those lies, so I am nullifying the contract."
Not at all. If the contract were declared a nullity, the parties would go back to their pre-contract state. -- Bank gets its money back, and no lien. The judge is saying "you didn't rely on those lies."
Why not turn that around and apply it to (e.g.) false advertising? "Sure the snake-oil salesman lied, but you shouldn't have believed him. Case dismissed!"
Happens all the time. Google "puffery."
This is nowhere near a precedent. What about "The T.J. Hooper"? "Judge Hand held that the standard of reasonable conduct to be applied in negligence cases must evolve as technology did. When faced with the defense by the vessel's owners that most owners of coastal tugs did not use radios and that having one aboard was not the industry standard, judge Hand ruled that the question was not what was common, but what was reasonably possible and knowable to a person of ordinary prudence under the circumstances." A banker of ordinary prudence checks pay stubs, even if his peers don't. Of course, that was 1928...
If the case reveal fundamental flaws in the law, is everyone going to wait for the legislator to correct the flaws?
I don't know where you're from, frenchie, but here in 'merica we've got laws.
Yes. You wait.
Cheers,
prat
Congratulations to Judge Tchaikowsky on the ruling, and to Uncle Festus and Tanta for letting us all know about it.
However, I suspect Vader will be right:
All that will happen is that the lenders will go to Congress and get the Congress Critters all excited about campaign contributions. Then a new bankruptcy law called "The Citizens Patriotic Relief Act of 2008" will pass mandating that debtors are responsible for everything and allowing creditors to take children, pets and body parts to satisfy debt.
The analogy for me is the disappearance of the proposal to let bankruptcy judges revalue houses.
anta,by any chance was the Hill's lawyer named Linda Green? She made a won a similar argument some months ago in Santa Rosa which prevailed,but if memory serves it was a first mortgage.For those upset with the Hills and who see NCC as a victim,this was a "Stated Income W-2" loan.A STATED INCOME PROGRAM FOR WAGE EARNERS.Is there anyone ,anyone at all that does not think that the "Stated Income" on 100% of these loans was "misstated"?or that they were anything but guaranteed to fail insanely risky asset backed loans?
Nemo, Tim
i'm with you...id feel better if the judge found liability on both sides.
however lets not forget that the borrowers were playing the lenders game using the lenders rules.
so if i HAD to put blame on one side and one side ALONE, then i would hold the lenders and their agents solely responsible.
however imho a best practice would be a split, but still with the larger liability to the lenders
anta,by any chance was the Hill's lawyer named Linda Green?
The document does not identify the Hills' counsel. It was served to one Joshua Scheer of Scheer Law Group, but I cannot tell if he is plaintiff's or defendent's counsel.
And yeah, the Hills are getting punished, but no more than someone in the same situation who did not commit fraud. I have a problem with that.
- Nemo
I highly doubt someone earning the stated $190K/yr income would need equity withdrawls to avoid insolvency.
Schnaps, 7 places in 24 years. 2 of those were cut very short by my irritating questions about why we were double billing customers and keeping the cash and why we didn't pay sales taxes for $ millions in hardware purchases. So, let's call it 5 jobs, 4 bosses.
But most have been consulting type roles, so the tasks vary. In the past year I've been on Sarbanes, Contract Revenue Recognition, reconciled Revenue for subcription services and am now implementing a new ERP system. "Run Forrest run!"
I had a brief stint in self-employment, but didn't like the 100 hours a week thing.
The case has very, very minimal precedential value, as it is a narrow ruling on "reasonable reliance", which is always a fact-specific inquiry.
It befuddles me--why spend a gazillion dollars chasing a worthless exception to discharge, even if, as Tanta says, it is to "impress the auditors".
Perhaps a smart accountant would know when this loan would get written completely off, and whether pursuing an exception to discharge delayed its ultimate hit to the balance sheet. Pain delayed is, I suppose, worth something.
A few random thoughts on things which have been raised in these comments:
I'd comment on the arguments here about the value/purpose of bankruptcy laws, but as a bankruptcy lawyer, I'm a bit, ahem, busy these days.
I think the moral hazard piece of this decision hasn't been discussed enough (though Dryfly mentioned it). This is what I like best about the decision. While it is true that this decision isn't precedent, it supplies reasoning for other courts to use, and if we are lucky it will be influential.
Of course no one has any sympathy for the Hills. Moral hazard isn't about sympathy. It's about what will happen next time. If the ruling does turn out to be influential, banks are on notice that liar loans are asset loans, and they can treat them accordingly or take big losses. Similarly with IBs, investors, etc.
Banks et al. took a hike on doing their jobs for a few years there. It hasn't served anyone well.
What about moral hazard regarding the borrowers? This decision doesn't make any difference in the decision making of such borrowers. A similar couple in the future won't condition their behavior on whether one loan in a bankruptcy was discharged or not.
"In essence, the Court found, such lending guidelines boil down to what the regulators call "collateral dependent" loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower's ability or willingness to repay."
So in essence, these stated income loans were really hard money loans?
Oh, and fraud is much harder to prove than breach of contract - deliberately. This isn't legislating from the bench, but old, well established law.
the cops programs on tv have the video of drunk drivers. If Nat City had put in place a video camera to tape the meetings between the borrower and their loan officers, wouldn'tthis be worth viewing to make our own decision on how much the borrowers were snookering the lender?
Just a few comments to supplement those already given by BankruptcyLawyer:
Dryfly, BK law is federal law. It will always trump state law when they reach opposing results in the same situation. CA's law allowing recourse for refi's is intact but BK is always available to individual debtors whose cases qualify.
National City was seeking to be treated differently than the other creditors whose claims were being discharged. Because of this, the burden of proof rested with them to establish their right to be treated differently than the other creditors. There were specific things they needed to demonstrate. One of them was "reasonable reliance" on the misrepresentations. They could not make that showing. The court's ruling is unremarkable.
This is the first level court in the BK system. Its opinion has no real precedential value. If an appellate court rules in a similar fashion THEN you will have something significant.
Nothing in the BK ruling prevents criminal sanction against the Hills for their conduct if they did, in fact, violate any criminal laws. However, as MOM has already pointed out the cost of prosecuting and jailing all these people is far beyond what CA or any state can afford.
The answer to argument on this thread lies in the answer to...Can you misrepresent your income on a "Stated Income Loan" ? Yes and the bankrupt couple engaged or tried to engage in Fraud. No (and the loan criteria suggest so too) and FCC is just a naive bank who got taken.
Always remember the golden rule, "He who has the gold makes the rules" FCC had possesion of the gold and made the loan rules. The consumers lied (because the bank said it wouldn't check - nudge nudge).
The amazing thing is a Judge's ruling !
For others pissed about the lender being "punished" for the lies of the borrower, I think gng made a very good comparison relating to stolen goods. Suppose one bought a 42" wide screen plasma TV still in the box for $40, upon the promise of the seller that it wasn't stolen, and the assumption that the police won't find that you bought it. If the police do track you down, and reclaim the TV, they're not going to believe that you actually relied upon the promise of the seller that it wasn't stolen. If the only thing you have is the TV, you might be lucky to not get brought up on charges for receiving stolen goods. But they're not going to get your $40 back. They assume you knew it was stolen and you figured that the trade off of losing $40 for the chance of not being caught with stolen goods was good enough.
I think Tanta is definitely correct to say that the banks entered into the loan only because under the assumption of drastically and monotonically increasing land/house prices made it a safe bet. Either the FB would sell the house, and maybe make a small profot for themselves, or it would be forclosed upon for enough to cover loses. They were wrong, and lost. They are unconvincing to say they believed the lie. They were widely called liar loans back in 2005, and the loan was entered into in 2006 for crying out loud.
this combined with the alt-a downgrades and possible future downgrades from AAA, are two big shoes
how many shoes does a body have?
Caveat Argentarii?
and I am so counting on Tanta to correct my Latin.
No doubt, National City should
have thoroughly verified the income.
No doubt, these borrowers have learned that "lying" will get you what you may need, and certainly what you want.
The only precedent that should result is that "income must be verified for all types of borrowing".
Face it folks, have you ever had to
supply a pay stub with a credit card
application? Has the F&Y man at the car dealership ever made you produce
one? And yet, we wonder how consumers come by feeling that lying about their income is no big deal.
It's back to basics folks-if you want
it, prove you are worthy. Let that be the precedent of the day and then both the consumers and the banks will be protected against themselves! No harm, no foul.
What, neither of them will ever work again?
eh | 05.29.08 - 10:56 am | #
Check out what they owe and what they make - they NEVER made over $65K/yr COMBINED - EVER. Yet owed hundreds of thousands plus interest.
Blood - stones? Foolish - bank? Judge - move on? Get it?
Emma Anne: regarding moral hazard, I think that this is a good ruling. There are a lot of unscrupulous people looking for loans. There are fewer banks, and in theory they're well regulated. The side that should be working to avoid fruad (and passing that cost on to the borrowers), is the banks. There is a much larger moral hazard towards banks turning a willfully blind eye, and then later mimicking my 4 year old with a statement of "I not knew."
Personally, I think there ought to be a way for the court to make a finding that the lender was complicit in fraud, and make that fact available in their credit report for the next 15 years.
Rob Dawg | Homepage | 05.29.08 - 11:00 am | #
Amen.
Shouldn't the Hills be subject to criminal law for the signing of the papers? I think the that's what the fine print at the bottom says. Maybe that'll satisfy Nemo.
And I'm wondering, what was the constraint that they asked only for a 30% increase. You wonder at what point someone would have said," This is ridiculous!"
Whocoodanode that liar loans attract liars? Obviously not the banks - according to some of their apologists here.
dryfly: for an amen, I think it should be that both the lender and borrower should have records of fruad on their credit report. As shown with them correcting parts of the loan documents, both parties fully had the knowledge of fruad.
Shouldn't the Hills be subject to criminal law for the signing of the papers? I think the that's what the fine print at the bottom says. Maybe that'll satisfy Nemo.
That's not that BK judges jurisdiction - the local DA can look into that & press a criminal case IF s/he doesn't have better things to do.
and I am so counting on Tanta to correct my Latin.
Don't count on it. I just mispelled "defendant." I can't even be self-righteous today about other people's English, let alone their pig Latin.
dryfly: for an amen, I think it should be that both the lender and borrower should have records of fruad on their credit report. As shown with them correcting parts of the loan documents, both parties fully had the knowledge of fruad.
anony-1797 | 05.29.08 - 12:10 pm | #
The borrower has the BK on their record - then lender the fraud complicit & extenuating factor.
But in both cases that would be moot without some kind of 'legal finding'. A BK judge can't call it 'fraud' - not in a criminal sense - s/he can just throw out the lenders appeal to attach based on not being 'reasonable' (those 6 points).
Check out what they owe and what they make - they NEVER made over $65K/yr COMBINED - EVER. Yet owed hundreds of thousands plus interest.
Plus, the fondue forkers want these folks to do time for fraud plus have criminal records on their credit reports for 15 years. I'm sure the next proposal is going to be that we put them on a "HELOC Abuser Registry" to prevent them from ever being employed again or living within 100 feet of a building with people in it.
That'll help their future earnings potential, sure.
...according to some of their apologists here
Who's 'apologizing' for banks here?
Blood - stones? Foolish - bank? Judge - move on? Get it?
Wow, how cryptic and cool; wish I could write like that.
Ever here of wage attachment? It's done all the time.
Note: I've not said it ought to be done in this case.
What I've done, and what I believe others have done, is express a certain degree of disgust and outrage that obvious spendthrift scumbag liars (a possible book title comes to mind: 'None Dare Call Them Thieves') could just go Ch 7 and get the debt discharged.
Get it?
"According to the court, their combined annual income never exceeded $65,000."
OK, but isn't that income level higher than the median?
How did they qualify for Chapter 7?
Did their income drop or did they intentionally allow it to drop to qualify for Chapter 7?
That's not that BK judges jurisdiction
Yah, but that's part of the reason Nemo got all worked up, separating the different crimes committed here.
And although this may not set legal precedent, no doubt the repercussions are more than just ripples in a quiet pond; more like sloshing in a tanker in high seas. Will NCC capsize?
What I've done, and what I believe others have done, is express a certain degree of disgust and outrage that obvious spendthrift scumbag liars [...] could just go Ch 7 and get the debt discharged.
Yeah, we heard you. What the rest of us have done is pointed out that banks have known for some centuries now that, absent bars, safes, alarm systems and, yes, prudent lending standards, people would seek to rob them blind, notwithstanding the disgust and outrage of a segment of society.
Any bank which throws this protective apparatus out the window and relies on society at large to subsidize its new streamlined lending practices -- because there really is a cost to society for the workhouse/garnishment/weigh-your-soul-against-a-feather BK court model -- acts at its peril.
Did their income drop or did they intentionally allow it to drop to qualify for Chapter 7?
You really don't think Judge Tchaikovsky sounds awake and alert enough to have seen to it that these debtors met the "means test" for those who make more than the median?
Some of you people watch too much Judge Judy.
Ever here of wage attachment? It's done all the time.
Ya its done with child support - I think once somebody even paid it. Don't quote me on that though.
Add...
'Wage attachment - angels on head of Hill family pin' to blood - stones theme if that will help you.
Councilor, you got no case - the judge WISELY threw it out. Kudos for her.
Good G_d! Who in their right minds would lend money to americans? If one does due diligence and checks you out and doesn't lend you the money...I am discriminating, red lining, bigoted, insensitive, etc. (see The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) If I do lend you the money, I get screwed. I am getting tired of visiting foreign countries and being told that "we like you americans but PLEASE KEEP YOUR DAMN LEGAL SYSTEM AT HOME". This whole thread makes it so much easier to understand their sentiments.
Some of the commenters here are bringing back unpleasant memories of a long and tiring 'discussion' with an old boyfriend who was incensed that the Prodigal Son in the parable got off without punishment while the well-behaved 'good son' had to share 'his' inheritance.
At least one of us learned a lesson from that. People who spend a good chunk of their time fulminating over what they consider insufficient punishment for wrong-doers will eventually take out their anger on a more practical target-- you. Since then I dump the resentful before they give me cause to feel the same way.
Good G_d! Who in their right minds would lend money to americans?
diogenes | 05.29.08 - 12:41 pm | #
Hopefully only those who do DD & effectively 'collateralize' their loan. Obviously our own banks aren't doing that.
BTW - last I checked, nobody put a gun to their head to throw money at us.
" Yes, that is a big major honkin' deal.
Tanta"
Nicely understated.
I'm going "wow." Normally I wouldn't agree on stuff like this. But the 'devil is in the details;' these loans should never had been made.
Banks speculated on real estate. One good think about the US legal system is bankruptcy allowing a fresh start. It lets Americans take more risks and thus grows our economy; long term this is normally a great thing. Now for the next 3 to 5 years...
Got Popcorn?
Neil
ps
I'm with many of the above posters. This will accelerate the downturn. Its also going to tighten credit. That I'm ok with. Credit is a good thing, but only when its limited to reasonable terms. (e.g., 50%+ DTI's are not reasonable.)
I'm with many of the above posters. This will accelerate the downturn. Its also going to tighten credit. That I'm ok with. Credit is a good thing, but only when its limited to reasonable terms. (e.g., 50%+ DTI's are not reasonable.)
neil | Homepage | 05.29.08 - 12:46 pm | #
This 'lefty' agrees with you - moral hazard is NOT a one way street. We got lots to learn - all of us, banks too - learned the hard way I'm afraid.
My only regret is that I couldn't be the fly on the wall listening to the meetings at Nat City where after the finding their legal team brief the execs. Really, whocoodanode?
Hey, just remember when it comes time for NCC to do its' Ch 13, why it got there in the first place.
BK- the topic of aspiring law schools grads as the next growth industry.
I think what the judge did was absolutely correct. After all, if the bank is handing out money to everyone who can fog a mirror based on ridiculous real estate speculation, when the speculation blows out, the bank gets to share in the pain.
I am sure that the folks who got in over there heads never thought they couldn't sell and get out too- they just stayed too long at the party.
If they had sold in 2006, I bet they never would have gone bk. They would have won at the real estate game, and moved to St. George Utah to play again in their next house.
Someday this war's gonna end...
Generally, the only way the lenders get unsecured debt declared undischargable in BK is to prove some sort of deliberate fraud. It's one thing if a borrower supplied forged tax returns, which is a flagrant fraudulent act, and should be deemed fraud, as such documentation should be "reasonably relied upon". But what of a borrower making "fraudulent" (gasp!) uncorroborated "statements" that exaggerate thier income? Well, that's what this ruling was about.
NCC crying 'fraud' in these circumstances is a rather tenuous claim, IMHO. That's putting it mildly, I might should probably say that it's a stance that takes balls the size of Church bells to be making at all.
I don't think we'll be seeing an appeal on this ruling from Hon. Judge Nutcracker.
Ralph Cramdown writes:
Yeah, we heard you. What the rest of us have done is pointed out that banks have known for some centuries now that, absent bars, safes, alarm systems and, yes, prudent lending standards, people would seek to rob them blind, notwithstanding the disgust and outrage of a segment of society.
Yep. As Ziggurat eloquently posted on another thread:
"There is roughly an infinite demand for bad loans at all times. The problems are on the supply side."
BTW - last I checked, nobody put a gun to their head to throw money at us.
dryfly | 05.29.08 - 12:45 pm | #
Can I get an amen!
Uncle Festus--on your point 1.) You never know. IANAL, but I'm very interested in IP law. ISTR that the Bridgeman Art Library was BEGGED by others not to appeal Bridgeman v. Corel. and create a precedent.
It's not that the bank was careless, "oops we didn't catch this fraud." This loan program was specificly marketed as not having income verification. In the 42" plasma analogy, they told the seller that "WE WON'T LOOK AT THE SERIAL NUMBER." And then they "returned" the tv to Best Buy because there were missing pixels.
yipppppeeeee
scav --
Caveat Argentarii?
I am not Tanta (mild understatement), but since "Argentarii" is plural you need a plural verb (*):
Caveant Argentarii
(*) third person plural, present active subjunctive, to be precise
P.S. "Nemo" is not a reference to the fish, nor to the Captain.
Jim:
You may be right re the appeal, and the lender might just appeal to clear its good name (which has now been dragged through the wringer on a certain well-respected, high traffic, blog...). But in my experience, banks are businesses which see the same issue in hundreds, even thousands, of cases and choose their appellate fights pretty carefully, as they know that any binding precedent in one small-dollar case could have a catastrophic impact on whole portfolios. Usually the ones they take up on appeal are those where the facts are unsympathetic to the borrower and these facts are pretty sympathetic (though the judge did find that the borrowers' claims that they didn't read or understand the loan application was 'not credible'...a polite way of saying it was BS).
In any event, the period to file a notice of appeal is ten days from yesterday. As the deadline would fall on a Saturday, the last day for them to appeal is Monday, June 9. I'll let you all know if they appeal, though by that time I'm sure the discussion around here will have long since moved on.
Nothing in the BK ruling prevents criminal sanction against the Hills for their conduct if they did, in fact, violate any criminal laws.
Is there any issue about double jeopardy here? Their misrepresentation has come to light because of this BK case.
I am certain that there is no double jeopardy issue. Crimes often come to light in bankruptcy cases and are then prosecuted. The bankruptcy case itself is not a criminal prosecution for a crime, so there's no issue re double jeopardy. As a practical matter, though, I think the chances of any prosecutor(state or federal) spending any resources on this are zero, particularly as the bk judge ruled that their conduct didn't even give rise to a fraud ruling.
Is there any issue about double jeopardy here? Their misrepresentation has come to light because of this BK case.
bananatree | 05.29.08 - 1:49 pm |
I didn't stay at a Holiday Inn last night but my guess is no double jeopardy here - BK is civil not criminal.
HOWEVER if the judge finds there is substantial evidence suggesting a criminal case my understanding is s/he HAS TO refer it to the appropriate authorities (local, state, federal - depending under which jurisdiction the offense falls).
That 'has to' has some leeway but as an officer of the court - if s/he discovers a 'smoking gun' then s/he has to refer it for prosecution by SOMEBODY.
Now that 'somebody' might say "Thanks - I'll get right after it soon as I finish the cases on these meth labs we've busted and the two serial rape cases we have going on..." meaning nothing really happens - but I believe these folks ARE potentially in jeopardy should somebody not have something better to do (or craves attention on a certain high traffic RE blog).
I doubt the judge does much - just lets the public record speak for itself & if inquiring minds over at the DAs office want to look then they shall find.
Maybe Uncle F above can make this his own personal Idaho & keep us posted. Lord knows there are worse offenses to the OT jay walking laws occurring here daily (dryfly sheepishly raises hand - me).
Good G_d! Who in their right minds would lend money to americans? If one does due diligence and checks you out and doesn't lend you the money...I am discriminating, red lining, bigoted, insensitive, etc.(see The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) f I do lend you the money, I get screwed. I am getting tired of visiting foreign countries and being told that "we like you americans but PLEASE KEEP YOUR DAMN LEGAL SYSTEM AT HOME". This whole thread makes it so much easier to understand their sentiments.
Actually, it is your comment that makes it so much easier to understand their sentiments. Can you please quote where in the Community Reinvestment Act it says that you can't do due diligence?
Citing the Community Reinvestment Act in context of the current mortgage crisis is a positive lab test for congenital idiocy, and thus, highly suggestive of multigenerational incest.
Please pray tell what DA would pursue a criminal fraud case when a judge has reviewed the contract between the Hills and Nat City and ruled that the income misrepresentation was not a material fact relied by Nat City on to extend the loan?
Talk about a loser prosecution.
Sniglet writes: The real mystery here is why Nat City even bothered going through the expense of fighting this issue in court.
That's a good point. Maybe they thought they could sell-on the HELOC debt for 10 cents on the dollar... or perhaps they were just trying to set a precedent for future cases... well, they got one!
You're right, Nemo.
No judge should reward anyone for lying on a business contract. This decision will further encourage lying on loan applications as well as walkaways from underwater mortgages. Worst of all, if this decision stands, it will further drive lenders out of the mortgage market.
On the bright side, this may decimate the entire practice of stated income loans. While there are occaisional valid uses for stated income loans, there are too many opportunities for fraud, exploitation, and over-extending.
If this leads to the end of stated-income loans, then the costs are probably worth it.
"Nothing in the BK ruling prevents criminal sanction against the Hills for their conduct if they did, in fact, violate any criminal laws. However, as MOM has already pointed out the cost of prosecuting and jailing all these people is far beyond what CA or any state can afford."
However, I would like it if the all of the new FHA/GSE programs for upside down borrowers would take a look at the original loan docs and disqualifer borrowers who lied.
May the Hill's die a very painful death after the hospitals take all their money.
Whoa, frickin whoa, some banks are going to be shaking in their shoes. I'm surprised by that ruling.
IANAL, and please just quote the answer if it's already been stated (I only read the first half of the responses), but... wouldn't the borrowers also be guilty of fraud, at least criminally (if not civilly)? Didn't they also commit perjury?
I applaud the ruling; it was rational and well thought out, and should serve as a wake-up call the all the lenders who gave out billions in liars loans knowing they were fraudulent and not caring. They were implicitly relying on only the asset value, and those debt should be able to be discharged during bankruptcy.
Regardless of that, though, the debt discharge should not nullify the penalties for the obvious criminal behavior on the part of the borrowers, right?
P.S. "Nemo" is not a reference to the fish, nor to the Captain.
Then is Polyphemus still looking for you? Well, since his eye is gone: searching for you?
Nemo,
You were a bastard to take my hospitality and kill my sheep and all that. I'monna take you to court!
Reading the Nemo - Tanta chain, I feel like that debate can be recast differently.
The people that defend the court ruling - e.g. Tanta - feel strongly (and probably correctly) that the legal decision in this case is justified given the facts of the case and the letter of the law.
The indignant response from some of the posters, e.g. Nemo, stems from a perception that the spirit of the court ruling is sanctioning and even encouraging personal fraud. That negative reaction leads to strongly question the judge's decision on the basis of its social justice implications.
In terms of dispensation of justice, NCC has been punished. Their claim has been emphatically discharged and they have been told to go mingle with high speed highway traffic. They have already lost their full HELOC principal balance (to the extent to which they retained the loan on balance sheet) so they are not doing very well at all on this particular loan. More holistically, their stock is down from a high of 39 to its current value of 5.5. They drank their own poison too, they have 18B in HELOCs as of March 2008 vs. a market capitalization of ... 4B. There is no way to spin that in a positive way for them and their stakeholders, and clearly whatever they were doing on the origination side has backfired miserably for them. Some people hate them for their underwriting recklessness (other pity them for the lack of business sense) but there is ample opportunity to feel vindicated.
Has NCC broken specific additional laws (e.g. discrimination, misrepresentation, etc.)? Then they should of course be prosecuted to the full extent of the law - since the law applies to everyone equally.
On the other side, the Hills have lost their home. Given their household balance sheet it was only a matter of time until that happened. Other honest borrowers have had a similar misfortune in recent months and it is surely a traumatic event in one's life. However, something is different about them. They have been proven to have committed fraud. There is proof. This is not a minor infraction, e.g. jaywalking. They knowingly committed fraud (with the implicit complicity of the lender) to appropriate hundreds of thousands of dollars.
Yes, rape and murder and robberies take priority and should be prosecuted ahead of this fraud charge. But I suspect that real revolt that people (and I will include myself in that category) felt was at the notion that the Hills should get a free pass from the law.
"No judge should reward anyone for lying on a business contract. "
The judge did not reward lying in a business contract. In this case, it was found that the lie was not material to the decision to lend. The judge ruled that only an idiot would rely on stated income so grossly out of line with common sense and that the lending guidelines did not reflect reasonable standards for lending based solely on consumer stated income. National City failed to prove they were idiots and failed to demonstrate that their lending guidelines were fashioned to avoid blatant misstatements of income, therefore the judge found that National City did not rely on stated income but rather relied upon factors other than stated income to proceed with the loans, i.e., the expected real estate appreciation.
People lie in contracts all the time. When the contract goes into default, the judge looks to see if the lie would have materially affected the decision to enter into the contract. In this case, the judge rightly found that the stated income of the Hills was not the deciding factor for Nat City in proceeding the the mortgage. You cannot enter into a contract with known, or reasonably should have known, misrepresentations and expect a judge to enforce performance when you chose not to protect your own interests in the first place.
"They have been proven to have committed fraud."
I think that the discussion above indicates that it is probable that they made a false statement. It is not proven that they committed fraud. Given that NCC brought the case, it seems likely that the loan officer was not complicit in the false statement, but that is similarly not proven.
Further, they were not given the loan based on their false statement. The finding of fact by the judge is that they were given the loan based on the collateral. The judge found that the false statement was immaterial to their "gain".
As a real estate investor, I have signed loan documents with errors on them. Once it was a missing rental property because we have a couple that are almost identical to include the loan number. Another time it was an error in the IRA assets. Those are the ones I remeber, I'm sure that I noticed others over the years. If something horrible happened to me and I defaulted on my current primary residence loan, which no doubt has an error somewhere in the documentation package - I would hope that the judge would make a similar determination of materiality should the bank come after me.
I'll re-iterate my comment that an appropriate penalty for such false statements is to be ineligible for the increasing large number of federal goodies being passed out.
I should add that I have been self employed with a significant period of negative income over the past 10 years and have always done full doc loans.
It is a stretch to argue that the Hills' income 'misstatement' is akin to an inconsequential typo.
It is also difficult to take pride in a legal system that doesn't punish people that engage is such activities. Think of all the honest hard working renters for example that would have loved to have bought their own home but could not afford one. What's worse they were unwilling to lie on a legal binding document in order to inappropriately secure what wasn't rightfully theirs. The sad sobs.
The life lesson that is being taught to the next generation is that when you perceive an opportunity to exploit the legal system, you should jump all over it before someone else does it. Hard work and thrift are for losers.
And for the Hill apologists on this forum, to support that point of view with a sense of pride in the technical prowess and accuracy of one's technical legal argument is like boasting about the elegance of the woodwork on the sinking Titanic. True but irrelevant and missing the point.
"It is a stretch to argue that the Hills' income 'misstatement' is akin to an inconsequential typo. "
But if I understand all the smart folk above, that is what the jusge ruled. That is what makes the ruling a big deal.
The Judge did not rule that the Hills' misrepresentations were equivalent to a typo. She ruled that they were material misreps made knowingly by the Hills. However, NCC had to prove MORE THAN that in order to get the debt reattached.
She ruled that NCC did not meet the sixth of seven legal requirements for reattaching a debt in bankruptcy. She was obligated to rule on that question because that was the motion before her.
This was not a criminal trial of the Hills. The Judge did not have the option of ruling on NCC's motion by finding the Hills guilty of the crime of fraud. She does not preside over a criminal court.
I have seen no one on this thread "apologize" for the Hills.
The fact, however, is that stated income lending will go on as long as lenders find it profitable. And it will be profitable under a "heads I win tails you lose" setup where they either get paid back because of property appreciation or, if values decline, they can make the borrowers assume all responsibility for the fraud in which the lender was complicit. The only thing that will get through to these lenders is nasty experiences like this one with Judge Tchaikovsy. I am personally less concerned with what happens to the Hills than I am with what happens to our entire economy, and I say loose lending is threatening us all and needs to stop. You are free to disagree but you are not free to claim I'm apologizing for two-bit losers like the Hills.
As a number of our legal commenters have asked above, can everybody quit ignoring the fact that this was a ruling based on a specific set of requirements of a specific cause of action in a civil adversary proceeding that is not a criminal court? I know it's easier to just kibbutz about how everybody hates the Hills, but who the hell cares about that?
I see this an a compliment to the argument put forth by bank apologists, which goes, 'well people losing their houses due to insane sub prim loans have no one to blame but themselves, they should have read the loan paperwork and understood what they were getting them selves into with neg-am loans and such, the loss of their home should have been a forsee-able risk, no one force them to take out a mortgage',
In this same way, the bank in this case, should have done some research, and used prosper guidelines. No one forced them to lend them money and default is always a risk that needs to be taken into account.
Tanta. In the previous post I had specifically agreed with you by arguing that challenging the judge ruling was not the relevant issue. I have no reason to believe it was a bad ruling.
The only point is that the Hills should have to face separate, unrelated criminal or civil fraud charges.
Thank you, Uncle Festus
Hills' income 'misstatement' didn't have to be a 'typo' to be ruled to be inconsequential in the lending decision.
Note: this only became a big-honkin'-pernicious fraud (gasp!) situation only after the HELOC lien was foreclosed out, leaving our bagholder with an empty, soon-to-be-discharged sack-o-nothin'. And her honor called BS on that.
Any day now, some old d00d is going to die thanks to popping Viagara that he was prescribed from an online doctor who never met him in person. Should we blame the deceased for making his doctor rely on 'fraudulent statements' that he made attesting to his 'excellent cardiac wellness'?
InvisibleHand: This decision will further encourage lying on loan applications as well as walkaways from underwater mortgages. Worst of all, if this decision stands, it will further drive lenders out of the mortgage market.
No, no. As you note later in your reply, it may curb the practice of granting stated income loans. Well, at least for wage earners where the stated income is not even remotely plausible, and when the CLTV is high. But that's about all it could possibly accomplish.
This is a pretty narrow ruling by one lowly judge in a rather extreme case. At least I hope it is extreme, because the last credit extension appears to have been sheer lunacy from the facts listed in Tanta's post.
What's really hurting mortgage lending are these types of loans detonating in everyone's faces.
You all seem to be missing the point regarding "punishing" the Hills.
Bankruptcy is a CIVIL judgement, not a criminal judgement. Fraud is a criminal case. The bankruptcy judge made a ruling on the civil case, which is all she was legally able to do. She can't find them guilty for criminal fraud in a civil case! It is worth noting, as Tanta stated, that she called them reckless, strong words from the bench.
If NCC wants to take the defendants to court for criminal fraud, they are not going to do so in bankruptcy court. So far as I know, there is nothing stopping them.
Polonius writes:
What I've done, and what I believe others have done, is express a certain degree of disgust and outrage that obvious spendthrift scumbag liars (a possible book title comes to mind: 'None Dare Call Them Thieves') could just go Ch 7 and get the debt discharged.
Obvious spendthrift scumbag liars?
So 10 years back there was no fraud in the loan applications because only honest people existed on earth at that time?
Since time imemmorial there have been idiots, fools and cheats asking for loans. The lenders should just take their word and give it to them?
No one, NONE, ever was mandated to believe these bums and give them loans without diligence. The loan was made based on the hope RE value going up, and not income.
You (and the bank)pretend and believe that the loan was made on the basis of the stated income. The judge says - Are you kidding? Since when does anyone hand out money like that? You made the loan on the basis of the RE collateral, not on the basis of stated income.
You believe that it is OK for the stronger party - the bank - to enter into contracts that result in the destruction of the weaker party, the "scumbags". [strong & weak based on who has the power to make or deny the loan].
Given the choices
(a)the bank makes the liar loan, a reckless loan, and after the 'scumbags' default, grind them throughout life
(b)the bank not make the liar loan and leave the 'scumbags' to plod along in whatever wretched existence they could have had
you insist on the first. I think that you would insist that the bank MUST make the loan, so that the whole shebang follows and the 'scumbags' get fried, just so that you could sleep well knowing that its a dog eat dog.
I can understand the 'scumbags'. Not you.
It is worth noting, as Tanta stated, that she called them reckless, strong words from the bench.
And if everyone would quit barking about the Hills not being sufficiently punished, they might have noticed the specific context in which the bench issued those words:
Even if the Court were persuaded that they had signed and submitted the October Loan Application without verifying its accuracy, their reckless disregard would have been sufficient to satisfy the third and fourth elements of the Banks claim.
She is saying that A BORROWER signing and submitting a loan application without verifying its accuracy is displaying "reckless disregard," which has legal meaning.
So forget the Hills, who are clearly guilty of material false statements. This suggests that Her Honor thinks that ANYONE who does the old "I didn't read the loan docs, I just signed them" is displaying reckless disregard. Even people who did not state income and did not lie.
Um, that's indeed strong language from the bench. It suggests to me that these folks who come into Tchaikovsky's courtroom bleating on about how they didn't know they had an ARM because they didn't read the papers or they left the income part of their application blank and the broker must have filled it in later will get little sympathy from this judge.
Criminal action will depend on the DOJ or the local DA depending on which law is actionalble in this case. I thought the case we were discussing was in civil court. I guess the judge can make a referal. I don't know jack about the law.
The comment list was too long for me with my tiny reptillian brain to search for a comment that already covered this.
So just shoot me.
Folks, this is not as complicated as some are making it.
Yes, the borrowers committed fraud. However, as we all know (or I hope we know by this point), this fraud was invited and encouraged by the lending standards in question.
And as the bank is therefore involved in soliciting fraud and its policies establish a pattern of doing so, they are unlikely to get the better side of any judgment taking this into account, where the borrower does not ALSO have a pattern of commission of fraud.
In nearly all cases, the borrower will have one fraud to his credit - falsely stating income or assets to qualify for the loan - where the bank will have hundreds and thousands of such cases on its record.
Personally, I would go even farther than the judge did and order the bank to compensate the borrowers for the borrowers' losses. The banks were the ringleaders of the fraudulent enterprise and as such enticed many people who would never have been involved in any fraud whatsoever to participate in a mortgage such as this.
Only in a case where the borrower was also involved in other types of fraud would I view the two parties' participation as equivalent. In how many cases will we find the borrowers up to their neck in fraud, as we find the banks?
(My last comment, unless maybe someone asks another Latin question)
sdtfs and Polyphemus --
Well done. (Love "Clytemnestra's Sister", too.)
"Observer" hit the nail on the head. I am not claiming anyone is apologizing for the Hills. I am not claiming the ruling was wrong as a matter of law. Not being a lawyer, how would I know?
I am claiming there is something wrong if the Hills receive the same treatment as any family in the same situation who did not deliberately attempt to engage in fraud. They will not be prosecuted because the law is too "busy"? Or maybe because too many other people did exactly the same thing? That is really sad.
This particular decision may be so small as to set almost no precedent. Again, not being a lawyer, I do not really know. But I do detect in the tone of the judge's ruling -- "a poster child for some of the practices that have led to the current crisis in our housing market"?? -- a certain desire to "stick it" to the lender. I do sympathize with that desire... But if other courts feel and act similarly, especially if it works to the benefit of lying borrowers, then I do worry a bit about the unintended consequences.
My desire in this crisis is for absolutely everyone, from borrowers to brokers to lenders to investors, to get precisely what they signed up for. Court-mandated "cramdowns" and the like interfere with that, and thus violate my sense of fair play / karma / etc.
I guess in the end it is a personal thing.
The court's reasoning that NC didn't rely on the misrepresented income is laughable. Are we to believe that NC has no debt-to-income ratio prerequisite for loan approval? Good Lord, this loan doesn't even happen without reliance on income - it's a primary component of the loan. Terrible reasoning.
Of course the loan was centered on its security interest. Of course. But to allege that NC could care less about ability to pay is ridiculous. NC is not a property management company and doesn't want to own these homes. Homes that immediately go into default due to lack of ability are generally bad news and create huge expenses. Ability is always an issue.
That leaves us with the court's second line of reasoning - even if NC did rely on the misrepresentation, such reliance was not reasonable. I'm sorry, but NC was following its established business practices. These practices conformed with the industry standards. The end. But the court has to stretch and reach for the "red flag" exception - unbelievable, this judicial activism.
Same facts + different judge = different outcome.
The facts of their business process prove that that was indeed the case; that is why they simply took whatever figure was stated to be good enough for them, without verification.
A bank won't take a person at their word for establishing a checking account; they will verify identity and that the person does not have a history of abusing checking privileges.
How then could they possibly claim to be relying on simple stated income figure (where the borrower knows ahead of time the figure won't be checked)? The policy of making no effort to verify the figure makes explicit that they were not in fact relying on that number.
The ugly truth is that they didn't rely on any numbers at all, except the commission fee and the guarantee that no matter how garbage a loan they extended, they could find a sucker to sell it to. Only when the gravy train came to a screeching halt, and they were left holding a lot of the garbage they'd planned to pawn off to others, did they show the slightest care for the quality of the borrower.
Collateral dependency is the root of the problem. Stated income loans were absolutely, completely collateral dependent. We have more loans that are "prime" stated income loans that will default after the sub prime liquidations bring down the value of the "prime" borrowers homes.
Seems to be a fair ruling in my opinion in regard to "asset based loan".
Goodbye to stated income for a long time. Hello to a depressed housing market for quite some time.
The clarity of the judge's thinking is suprising and unexpected. Should
logical thinking startle me to this degree,
or have I just been desensitized by seeing bat shit crazy thinking for too long?
Is this judge politically immune from
the lender lobby?
Nemo wrote:
This particular decision may be so small as to set almost no precedent.
I'd argue that the precedent was set long before this ruling. So far as I can tell--and I'm not a bk lawyer either--it was a very narrow ruling within the bounds of a well-established law. The lender played with fire and got burned, first by the borrower and second by their own policies.
Wes--
That leaves us with the court's second line of reasoning - even if NC did rely on the misrepresentation, such reliance was not reasonable. I'm sorry, but NC was following its established business practices. These practices conformed with the industry standards. The end.
Just because the business practices were established and "industry standard" doesn't mean they meet the legal standard for reasonable.
This is mainly directed at the "Hill haters" out there. I don't know if they took monthly trips to the islands or got desperate for cash because of the general reason people wind up in bankruptcy court - a medical/job loss crisis. Doesn't matter.
What IS important is that a massive fraud was perpetrated on the taxpayers (bagholders of last resort) by people who specialized in loaning money - and shoved it out the door to anyone who could fog a mirror.
They employed "liar loans" because they didn't want to be limited to people who could actually pay the money back! Much ado has been made about the Hill's "fraud," but little attention is paid to those who suborned, abetted and encouraged that fraud.
How many times did this conversation take place?
"So you need $50,000, Mr X, is that correct?"
Yes.
"Now I notice that your income was $150,000 last time we talked. Now, as I'm sure you know, adding another 50k to your debt would require an additional...um...40k in annual income." Pause. Big smile. "But I'm sure that your recent promotion to assistant manager at Burger King carries at least that much." nod nod, wink wink "Right?"
"Um...right."
"Good - then I'll just put 190k for income, and if you'll just sign here, we can get that money in your account right away." Beaming, as he stands to shake hands (thinking of the fat commission and killer bonus he's gonna get), he says "Sorry to be so rushed, but we're just swamped around here - there's already another nice couple waiting outside."
Or alternately, he just hands them the paperwork and says "Don't worry about that income figure, it's just what we have to say to get it through. Your house is the collateral." nod nod, wink wink
Or he simply shoves the papers at em and says, "Sign here and we'll get your check."
So who committed the fraud - and upon whom?
I submit it was Wall Street and the banks who were the criminals - and we're gonna find that it was (among others) pension funds and the taxpayers who were victimized - while the fatcats bought Ferraris.
Is this judge politically immune from
the lender lobby?
This is a federal judge...lifetime appointment. If she wants appointment to other courts the political process comes back into play. If not...
Tom Stone: didn't you write earlier of a lawyer-acquaintance who had successfully made a similar argument regarding misrepresentation materiality?
I'm curious what this line of reasoning, if generally adopted, would do to the "warranty and representations" under which this effluent was packaged into securities and sold to small Norweigan towns.
Tom:
Actually, bankruptcy judges are not full-blown federal judges, with a lifetime appointment. Bankruptcy judges are "Article 1" judges, as their appointment is made pursuant to Article 1 of the Constitution, whereas a federal judge is an Article 3 judge. Bankruptcy judges are appointed by the circuit courts, and serve 14-year terms. They can be removed by the circuit court, but almost never are (i.e., they don't need to be impeached). The larger point re the judge being immune from political pressure is valid however, as a 14-year appointment is pretty long and they are usually reappointed if they want to keep the job. While bankruptcy judges do have individual biases (who doesn't?), and some are perceived as more "creditor oriented" and others as "debtor oriented," I don't think that there is much of a political angle. Generally bankruptcy judges were themselves bankruptcy lawyers, or at least commercial lawyers, so if there is any bias it's probably a result of their prior lives in practice. At least that's been my experience, and I think most bankruptcy lawyers share that view.
Thanks Uncle Festus.
It's sad to think that reading of the Ownership Society's rubble is causing me to learn more about bankruptcy law than I'd ever hoped to learn.
They employed "liar loans" because they didn't want to be limited to people who could actually pay the money back! Much ado has been made about the Hill's "fraud," but little attention is paid to those who suborned, abetted and encouraged that fraud.
So if the all the liars like the Hill's get charged with fraud, maybe NC exec's & brokers & MBS salesmen should be charged with 'conspiracy' - with the counts equal to the number of similar loans they have outstanding?
We don't have that many cells.The old Soviet Gulag didn't have enough space.
Tom writes:
Thanks Uncle Festus.
It's sad to think that reading of the Ownership Society's rubble is causing me to learn more about bankruptcy law than I'd ever hoped to learn.
Tom | 05.29.08 - 11:47 pm | #
I was encouraged to study BK as part of my MS in Mfg Systems - if that isn't a depressing commentary on the state of American business - I don't know what is.
The judge is making the point that both lender was dishonest, not stupid. As
WC Fields said, you cannot cheat an
honest man.
As a long time reader and general fan of this blog, I am quite surprised and disappointed at the reaction of both Tanta as well as most posters. Away from the particulars of the Hills' situation, the general poster bias revealed herewith is one where the borrower is the victim and the lender is the Ferrari driving perpetrator.
It is as if the posters on this forum have spent the last 1-3 years in a collective farm in rural Soviet Union of old. Has anyone bothered to look at what has been going on on Wall Street? Have you seen broker dealer stocks? Have you seen bank stocks? Have you looked even at the stock market performance? Have you seen GDP growth? Have you read about the government stimulus plan?
The banking system is in disarray. The very people that are portrayed as having profited from these 'liar loans' and having victimized borrowers to enrich themselves ... are getting fired in droves and are seeing their own deferred compensation being slashed by 90% or more in some cases (e.g. Bear Stearns).
No one is crying for them by any means - but to suggest that they have been plotting to achieve this sad state of affairs is naive and ludicrous, and only reveals a near-communist bias ("uh here come the evil money grubbing lenders who are raping widows and orphans"). The reality is more like the lenders have been stupid and made some horrible business decisions that they are paying through their nose for.
The ringleaders seem to have made out with glittering golden parachutes, while people who weren't in a decision-making capacity eat the downside.
And if they are impoverished - so what? These are the prime hands involved in the misallocation of capital, they deserve to end up in the poorhouse a lot more than people who are actually ending up there. If justice is to be served, they should have anything they have left that they earned from perpetuating fraud taken from them to defray the costs borne by the public as a direct result of their actions.
Why is everyone concerned about poor little NCC, and only targetting the Hills as the Fraudsters? NCC blew OPM. Lot's of it. Collected Fees. Big Bonuses. They thought they had framed up the Hills as the fraudulent party, and slept well at night.
The Hills are now toast.
OPM is toast.
The NCC folks might have to get new jobs whenever they go TU, but they get to keep their fees and bonuses....nobody is hunting them down for fraud.
Yet.
Reader,
1) so how are they paying through the noses for it? Are bonuses and fees
going to be returned? Didn't think so.
The investors are toast. But the "businessmen" who made these loans are most decidedly getting off the easiest.
2) So we have a communist-bias? Who wants to socializes the losses, comrade? (hint: the lenders) Let's privitize both gains and losses, or regulate both, eh?
3) I'll grant that none of them plotted to produce a grand credit collapse - one doesn't need a grand conspiracy, when the fees and bonuses for cycling OPM explain the feeding frenzy quite easily.
If neither the tax payers, nor the pension fund investors have to suffer the sins of the fund managers and brokers, then I'll have a little sympathy. Near as I can tell, we aren't there yet.
Re: Mook writes:
At least in California the mortgage is exactly a loan against your house. If you don't pay it, the bank could only get the collateral (home), but not your income - uness they do juridical foreclosure which is not a reasonable option here.
Do not forget the Fannie and Freddie - something credit card loands have no access to.
WC Fields said, you cannot cheat an
honest man. Well you can, but it's harder because he won't tell you what lies to tell him and make sure that you know that he won't be checking up on any of them.
While I have no pity for the borrowers, I completely agree with the decision here.
NatCity and most other lenders require(d) a 4506T to be signed at closing for all Stated Income loans(IRS Form "Request for Transcript of Tax Return" authorizing lender to pull borrowers tax returns). Funny thing is lenders rarely pulled the tax returns (until the meltdown began, of course) for an obvious reason - THEY DIDN'T WANT TO VERIFY THAT 80% OF STATED INCOME BORROWERS WERE MISREPRESENTING THEIR INCOME...
At the end of the day, as pointed out above, the judge was left to decide who to punish - the admitted fraudsters (and this was no minor fudge - they tripled their true income) or the lender whose acts conformed with the widespread industry standard. The entire point of the business practice/industry standard test is, in part, to counteract judicial bias and activism and provide an easily referenced code of conduct to establish reasonableness. This judge's reasoning is a fine example of judicial activism at its worst.
I thought the entire point of a business practice/industry standard was to ensure that BEST practices were being used by everyone and high quality was uniform.
If the industry standard sucks to begin with, then "we were following the industry standard" is no more a defense than "I was just following orders".
Judicial activism is what people call it when a judge calls a spade a spade and someone can't get away with what they wanted to get away with.
"The reality is more like the lenders have been stupid and made some horrible business decisions that they are paying through their nose for."
Show me a bank exec who can't make their own house payment due to sub prime loan crisis and I might feel a little sorry. Every top exec at Bear Sterns, Countrywide,Thornburg,New Century will all have nice lives.
And really isn't 'paying through the nose' supposed to be what is happening?
Under a capitalist system, isn't the risk of loss supposed to accompany the possibility of gain, so that people don't engage in stupid money making schemes, like, oh I don't know, say
LENDING MONEY TO PEOPLE WHO CLEARLY CAN'T PAY YOU BACK JUST SO YOU CAN MAKE COMMISSIONS!!!
Also, since NatWest are the ones putting themselves forth as "professionals", there's the fact that they didn't seem to do any due diligence at all....
I'd call it financial malpractice, but that's just me.
The judge is correct in her ruling...but to appease those w/bile, let us agree to tattoo 'LYING PIG' on the foreheads of people such as the Hills.
The WSJ's report on this case has statements from the borrower. Which I believe.
"I take full blame for living a lifestyle that we couldn't afford." Her family last year gave up the home, she says, which they had purchased some 20 years ago. They found themselves unable to make payments after having taken out additional debt, from National City, against the property. The lender that held the primary mortgage bought the home in a foreclosure sale.
"Under no circumstances did we intend to defraud anyone," she said. "And we signed a paper authorizing [National City] to call our employers and access our bank accounts, and they never did."
Are Borrowers Free to Lie? - WSJ.com
This is an absured possition.
It can only be justified in political terms.
Now party A attempts to defrud party B. Party A fails to detect the fraud.
Party A attempts to enforce its contract remedy,but the party that commmits the fraud is not held to the contract, becaue they claim and the court held that party A did not act resonably in reling on fair dealing with its counterparty and thus became a party to defrauding itself.
The court has destroyed the principle of contract entirely. ANd has done so without it would seem evidence of colusion. In short the court did not like the way the bank did business and so deciced to dislove legal contract. Indeed the court found that the very fraud the Hills commited was evidence of the fact that they could and should not be trusted.
So if an honest person had made a techinal error and mistated his income by a material ammout with out intent to defraud it would be resonable to rely on it and thus the contract could be enforced. Buy as party B intened to commit fraud it was not reasonable and the contract could not be enforced.
This is why legal resoning is an oxymoron and it is not resonable to rely on contract law of property rights in the US anylonger.
"I think Tanta is definitely correct to say that the banks entered into the loan only because under the assumption of drastically and monotonically increasing land/house prices made it a safe bet. Either the FB would sell the house, and maybe make a small profot for themselves, or it would be forclosed upon for enough to cover loses. They were wrong, and lost. They are unconvincing to say they believed the lie. They were widely called liar loans back in 2005, and the loan was entered into in 2006 for crying out loud."
SO on what evidence do we conclude this? or prehaps we do not need evidence? Now given that the Hills admitted fraud and purjury,and The bank was able to impune there credability how do we conclude that the bank is not credible?
Answer becuse if we don't trust the Hills neither should the bank. But in the 2nd lien cituation is it not possible that the bank did rely on income statemts in an effort to avoid the loan failing-- that is to protect thier investment much the way a bank will extend additonal credit to a business to help avoid failure. It may not have been a wise decision,but that does not make it an act of fraud in which they were complicit.
Chrisfs writes:
Whoa, frickin whoa, some banks are going to be shaking in their shoes. I'm surprised by that ruling.
no the banks will not be hurt. The taxpayer vis FDIC will be hurt and the investors, and every honest barrower who will now make up the losses via higher rates.
I am not surpirsed by this ruling --its from CA.
"People lie in contracts all the time. When the contract goes into default, the judge looks to see if the lie would have materially affected the decision to enter into the contract. In this case, the judge rightly found that the stated income of the Hills was not the deciding factor for Nat City in proceeding the the mortgage. You cannot enter into a contract with known, or reasonably should have known, misrepresentations and expect a judge to enforce performance when you chose not to protect your own interests in the first place."
Wow so that means that there is no resonable expectation of fair dealing.
So I must assume that my counter party intends to defraud me. But if I make such an assumption is it not reckless to do business with such a person. Would a reaonable person do business with a person who commits fraud as a matter of common business pratice. What burden of proof must I offer if I fail to detect a fraud? Does my Due Dilagence protect me if it is merely consitant with common business practice( as it appears to have been in this case), or is the case that, since any resonable person would would commit a fraud sucessfully would of necessity design a scheme that would defeat all such common checks,is the mere fact that I allowed myself to be defruded evidence that I failed to detect a fraud which I would have detected or prevent had I done X for any X were X was how I later discovered the fraud after the fact.
A common business practice may not be smart and it may not be sufficent, but it can not void the obligations under contract of the other party.
Now it may be that the contract did not provide sufficent protections in this case of that existing law superceed those provisions, but gather that this is a novel outcome,and that the bank in this case was at least relying on stable law when it decided t make the loan and common buisness practice in detecting fraud.
This will do more than end stated income loans. It wiil drive banks to redlineing and other practices, They will be sued of course but those kinds of cases they can win if they find enough fraud. In fact I would spend the next few years voiding loans and filing criminal complaints.
Tata:
"The only thing that will get through to these lenders is nasty experiences like this one with Judge Tchaikovsy. I am personally less concerned with what happens to the Hills than I am with what happens to our entire economy, and I say loose lending is threatening us all and needs to stop. You are free to disagree but you are not free to claim I'm apologizing for two-bit losers like the Hills."
I amire your idealism but no they will not
They will mark it as cost of doing business and move on. As they are no longer sure of recovery in BK court they will assume fraud and file criminal charges even for minor errors. They will file documents with the court in which barowers are requred to atest under oath to the acuracy of ther documents and they have them sign wavers. Many of these measures will not hold up,but they will use them anyway. Over the years I have signed many agreements that I know can not be enforced but they are used to intimadte. They will make binding arbitration a requirement for getting a loan and will require barowers to sign statement which may be used to incriminate or impeach them later.
That is all that has happened here. And those who commit or try to commit fraud will keep right on going.
As for example the fact that credit card companies must eat the fraudeulent use of cards has not prevented fraud,and they still send out pre approved offers to make it easy to get false cards--the cost of both fraud and fraud detection,and for that matter over the top direct mail are borne by the honest customer.
Dg
Folks, this is not as complicated as some are making it.
Yes, the borrowers committed fraud. However, as we all know (or I hope we know by this point), this fraud was invited and encouraged by the lending standards in question.
And as the bank is therefore involved in soliciting fraud and its policies establish a pattern of doing so, they are unlikely to get the better side of any judgment taking this into account, where the borrower does not ALSO have a pattern of commission of fraud.
In nearly all cases, the borrower will have one fraud to his credit - falsely stating income or assets to qualify for the loan - where the bank will have hundreds and thousands of such cases on its record.
Personally, I would go even farther than the judge did and order the bank to compensate the borrowers for the borrowers' losses. The banks were the ringleaders of the fraudulent enterprise and as such enticed many people who would never have been involved in any fraud whatsoever to participate in a mortgage such as this.
Only in a case where the borrower was also involved in other types of fraud would I view the two parties' participation as equivalent. In how many cases will we find the borrowers up to their neck in fraud, as we find the banks?
dg | 05.29.08 - 6:57 pm | #
This is the kind of politics I was refering to.
We have no evidence of any bad conduct on the part of the bank. If it exists at all it was not on the blog-- but prehpas it is in the full ruling.
IN ANY CASE YOU CAN'T JUST MAKE UP FACTS EVEN IF YOU ARE A JUDGE. I ask again what evidence is there that this bank did or failed to anything.
If you do not like the current standard buisness practice,and you think that any loans conforming to such practice need to be treated in a certain way under BK law then you have an issue with the banking regulators or the legislature.
If a bank is following current business practice has blessed by the banking regulators then you can not invent the fact that they are complicit in fraud.
Now it may well be that the dept should be dischagred anyway under Bk law- but does anyone really think this case would have been decided in this way if the value of the colareal had been destroyed say by fire? Or if the fraud extended to failing to ensure the property.
There is politics afoot here and it will hurt us all for decades to come.
The opinion has been published here:
http://www.georgiabankruptcyblog.com/Nationl%20City%20v%20Hill.pdf
Know a person who voluntarily defaulted on 2 heloc loans. A $99k Nat City and a $99k eLoan Bank one.
Also these homedebtors have a primary mtg with Nat City for $540K.
They voluntarily defaulted on the Helocs July 07. Also just got a expensive leased car. How I do not know.
But what are the consequences?
I found this really interesting:
"Obama motivates D.C. to initiate new lower and middle class bailout"
Obama's Taxpayer Bailout
The people that bend the rules GET PAID! You too can bend the rules by printing out fake paystubs w-2 w2 1099 forms using
http://www.proofofemployment.com/
Buy the home car or get a huge irs tax refund just for being you!
Do what you have to do to get yours! EVERYONE ELSE DID
http://www.fakepaycheckstubs.com/
Print out Fake Employment and Fake Income, Wages, 1099, w2, w-2, using your home computer printer! http://www.proofofemployment.com/