Junk, Dogs, Crap and Lemons

As the advertising jingle goes, ”You’re in good hands with Allstate.”   Little did Goldman Sachs realize the untimeliness of this saying and adage.

On August 15, 2011, Allstate Insurance Company and Allstate Life Insurance Company filed suit in the Supreme Court of the State of New York, County of New York against Goldman Sachs.   Allstate’s complaint arose out of its allegations that Goldman fraudulently sold residential mortgage backed securities to Allstate and in reliance upon Goldman’s representations, more than a hundred million dollars of Allstate monies was invested in – “junk,” “dogs” “crap” and “lemons.”

Many of the callers and clients to our law firm, now facing the ultimate potential loss of their homes, investment properties and commercial businesses through mortgage foreclosure proceedings and denied loan modifications are the underpinnings of this national market collapse.  Adding to the disgrace, concerns and worries attendant to these topics are the break-up of families, neighborhoods and businesses due to the repeated failings of lenders to observe good, common sense business guidelines, which permeated the lending philosophy and practices of the time.

This lawsuit highlights the well discussed failings in residential mortgage lending of a systematic abandonment of “stated underwriting guidelines, producing loans without regard to the likelihood of repayment”; primary residence loans made to borrowers who used the properties as investment or vacation homes; “vast overstatements of the value” of the properties, with “hidden liens that had been placed on the properties”, and thereby allegedly allowed Goldman “to reap millions in fees for the numerous roles it played along the securitization chain.”

One of the more fascinating subjects disclosed in this lawsuit is the notion that Goldman not only profited from the pooling process but that “Goldman was taking outside bets against many of the same assets and asset types it was securitizing” and that it “failed to disclose to clients that, at the same time it was recommending investments in Goldman-originated RMBS and CDO securities, it was committing billions of dollars to short the same types of securities, as well as their underlying assets, and even some of the lenders whose mortgage pools were included or referenced in the securities.” 

The scenario is often repeated in our law firm.  My cell phone rings or my email is filled with messages that have very much the same content:  the client repeats the similar factual recitation of being approached several years ago to buy a home with no money down or to refinance their home and have no concerns of the value or income ratios involved or one of a hundred other unique, yet common set of occurrences, sharing the same ending—mortgage arrears and mortgage foreclosure.  Allstate Insurance has now publicly proclaimed the position that it has suffered “catastrophic losses” on its more than $123 million dollars of securitization purchases, now owning “junk”.

United States Senator Carl Levin was quoted in the body of the lawsuit: “Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.  They bundled toxic mortgages in complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading the risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.”

During the early stages of our client meetings, office visits and document reviews, our file show many of the cases that our law firm is actively defending involves the homeowner defending their properties from foreclosure complaints brought against them by trustees of mortgage pass-through securities and other named but misunderstood identities.  Certainly, our clients look at these without any basic understanding of who is suing them in court and why their homes and businesses are at jeopardy by these unknown companies.

I have written about these types of lawsuits before and during our client discussions. We discuss the basics of how the original mortgage loan has lost its identity into a pool of mortgage loans, with shares of the pool sold to investors.  The sponsor of this type of arrangement in the case under discussion was Goldman Sachs Mortgage Company, who then transferred the pooled loans to the depositor who then deposited the pooled loans to “an issuing trust”.   There are many more complexities involved, with differing levels of investments, risks and benefits and then ultimately the trust transfers back to the depositor who issues the securities through underwriters for sale to investors. Your loans, your credit ratings, appraisals, personal information and documents are included and make up the basis for this entire process and product.  LTV ratios, income statements, credit reports and borrower profiles are contained in these files.

Imagine the innocence of Allstate and other investors, now shocked by the losses they are sustaining.   Our clients and new callers voice their personal violations and inadequacies as they recognize the poor decisions and advice given during the loan origination process. Fremont, Aames, Long Beach, American Home Mortgage Corp., Nova Star, WaMu and perhaps scores of other national lending institutions may have employed “systemic underwriting failure”  allowing false and misleading statements,” disregarding the borrowers’ actual repayment ability and value of the mortgaged property.: The sad statistics posted in this lawsuit -- “approximately 36.79% of the mortgage loans ….had to be written off & approximately 32.4%of the remaining loans are currently 30, 60 or 90 or more days delinquent – all within a few years of when the loans were made.”

“IndyMac Bancorp, Inc became the third-largest bank failure in U.S. history in July, 2008” with alleged “subpar underwriting practices, and the target of numerous governmental investigations and lawsuits”.  For those of our clients now facing mortgage foreclosure lawsuits and failed or continuing loan modification submissions, does the process sound familiar?  “…a loan rejection and the insanity would begin.  It would go to upper management and the next thing you know it’s going to closing”.   How many of my clients, readers and new callers can identify with this insanity.

The numbers tossed around are staggering when compared to the simplicity and values of our clients and callers in the halls of our law firm, Rubin & Licatesi, P.C.  Goldman paid $60 million dollars to settle a matter with Massachusetts and now faces other investigations and inquiries as a result of these practices.

Allstate may have been duped into invested in these products, but our callers and clients suffer the indignities, family break ups, mental and hospital visits, neighborhood destructions and physical and emotional damages due to the lending practices of the past. Take heart. When faced with mortgage arrears and mortgage foreclosure lawsuits, you have rights, defenses and options for solutions.   You can call and reach our law firm and seek to improve upon the quality of your life and protection for your homes and businesses, all in the overwhelming belief to…………KEEP HOME YOUR OWN.