Source: https://insuranceclaimsbadfaith.typepad.com/insurance_claims_badfaith/credit-rating-companies/
Timestamp: 2019-04-25 12:41:53+00:00

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CONVENTIONAL MORTGAGE LENDING: WHO YOU GONNA BELIEVE, ME OR EVIDENCE?
Respected real estate and housing finance reporter Kenneth R. Harney asks: "But are lenders lately playing a numbers game with consumers -- claiming they're willing to accept lower [FICO credit] scores while actually approving applicants with higher scores on average than they did last year or even earlier this year?" Kenneth R. Harney, "Real Estate / Lenders Say They're Easing Mortgage Terms. But Statistics Suggest Otherwise." (Washington Post Online Wednesday, September 9, 2015).
Harney's answer in the end: "[T]he statistical evidence suggests that, on average, it is increasingly people with higher scores, not lower, who are making the final cut." Id.
The trend toward mortgage lenders putting their emphasis on high credit scores is perplexing in view of the business model of making conventional mortgage loans. Did you know that the conventional mortgage loans business model involves making loans to relatively low-creditworthy applicants, making your profit, and then making more profit by selling the loan to Fannie Mae, Freddie Mac, or the FHA? Well, it is. See id. Which, to say again, makes the increasing emphasis on ever-higher credit scores a perplexing thing. There must be something behind the available evidence that we cannot see, yet.
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of "Lender Force-Placed Insurance Practices" (American Bar Association 2015). All Rights Reserved.
FINANCIAL PEOPLE, LEGAL FOLKS SEE GOOD FAITH DIFFERENTLY, THEY SAY.
"Investment professionals and lawyers see the world through different lenses." Mr. Kevin Donnellan, spokesperson for the Arizona State Treasurer, quoted by Gretchen Morgenson, "Fair Game / Dancing the Ratings Two-Step," p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, June 15, 2014).
The above quote was in the context of wondering why investors still rely on ratings by various ratings agencies even though the investors are suing them for losses caused by the raters' alleged negligence. The State of Arizona is in that category, along with many others described in the article.
The above quote applies equally to the field of lender force-placed insurance. In that field, too, investors see the world differently from lawyers -- and from homeowners. See the "Publications" page at www.dennisjwall.com for a freely downloadable/printable article on lender force-placed insurance claims and defenses.
INSTITUTIONAL BAD FAITH WILL SHOW UP IF IT IS THERE.
Newspaper outlets report on the press releases issued by the Department of Justice's civil lawsuit against Standard & Poor's (S&P). There is speculation that this may only be the first lawsuit in a series of potential lawsuits arising out of the causes of the Great Recession insofar as they involved the conduct of the credit rating agencies. See Andrew Ross Sorkin and Mary Williams Walsh, "U.S. Accuses S&P of Fraud in Suit on Loan Bundles" (New York Times Online "Dealbook" Blog posted on Monday, February 4, 2013). It is interesting that part of the Department of Justice's Claim against S&P is that S&P used incorrect computer models to gauge risk. See Peter Eavis, "U.S. Contends S&P Purposely Used Faulty Models" (New York Times Online "Dealbook" Blog posted on Tuesday, February 5, 2013).
As securitizations and related deals became more and more complex, investors and dealmakers relied more and more on credit rating agencies to spend the time required to evaluate the credit-worthiness of these complex deals. Reliance on the credit ratings agencies became -- and still is -- so pervasive that Federal Statutes identified the agencies by name or by listing characteristics that only they could meet, whenever credit-worthiness was at issue.
The many demonstrated failures of the credit rating agencies include the AAA ratings they incorrectly gave to Residential Mortgage Backed Securities or RMBS. See Jessica Silver-Greenberg, "E-Mails Imply JPMorgan Knew Some Mortgage Deals Were Bad" (New York Times Online "Dealbook" post on February 6, 2013). Parenthetically, every time I read that headline, I want to say, "Do ya think?" It should be noted here that most newspapers, including the New York Times, do not allow reporters to write their own headlines; editors are employed to do that.
This has led to huge Claims on Mortgage Insurance Policies and on Title Insurance Policies. See "Mortgage Insurance" and "Title Insurance" Categories on this Blog, and also on Insurance Claims and Issues Blog.
There is a question whether the credit rating agencies were ever fully accepted as a part of the financial framework governing the United States at this time. If they are, then I predict that the lawsuit filed by the Department of Justice against S&P over S&P's alleged misconduct and mis-rating of the credit-worthiness of certain securities, will resemble the settlements reached by such other Federal agencies and commissions as the Securities and Exchange Commission and the Office of the Comptroller of the Currency with investment banks over those banks' alleged misconduct which caused or contributed to the causes of the Great Recession. I predict that in that event, the reported Department of Justice civil lawsuit against S&P will be settled, and that the settlement will include a fine which will probably be less, perhaps much less, than 50% of the money S&P made from the alleged mis-rating, and that S&P will settle without admitting liability.
If on the other hand S&P and the other credit rating agencies are not accepted as a part of the governing financial framework at this time, then I predict that in that event the lawsuit will still be settled but S&P will only be able to reach a settlement by admitting liability, to something.
Finally, in any case I predict that based on past experience of lawsuits filed by Federal agencies, commissions, and departments, that the reported civil lawsuit filed by the Department of Justice against S&P will never go to Trial. There are many reasons that all of the past-filed lawsuits all apparently have been settled, not the least of which are definitely fear of losing and perhaps a lack of capacity to try cases.
In any case, Mortgage Insurance Carriers and Title Insurance Companies can expect more of the same old, same old, unfortunately for them -- and for us.
Nevada Sues to Set Aside Settlement Bank of America Allegedly Dishonored.
In a Complaint reportedly filed by the Attorney General of Nevada on August 30, 2011, Nevada has filed suit to set aside a Mortgage Foreclosure Fraud Settlement allegedly dishonored by Bank of America. I have searched PACER. Nevada's Complaint, filed in the United States District Court for the District of Nevada, is not available Online as yet. I will keep searching every so often. When I find the Complaint, I intend to post it here. In the meantime, Ms. Gretchen Morgenson has reported on it and her reporting is reliable. See Gretchen Morgenson, "Nevada Sees Violations of Mortgage Agreement" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Wed., August 31, 2011).
"These paperwork failures should have barred the bank from foreclosing on borrowers, the Nevada complaint says, but it went ahead nonetheless."
Whew. So do you think, based on these allegations, that this Bank can be trusted in future Settlement Agreements it makes concerning the Mortgage Foreclosure Fraud debacle? Many of these allegations concern conduct allegedly indulged in by Bank of America after it entered into the Court-approved Settlement Agreement with the State of Nevada, among other parties.
Apparently the remaining Attorneys General of the 50 States, all of whom are currently negotiating yet another "Settlement Agreement" with Banks and other participants in the Mortgage Foreclosure Fraud model, are paying attention to this development. See id. Watch for the Administration and several of the State Attorneys General to try to put pressure on the Nevada Attorney General to dismiss the lawsuit and accept yet another "Settlement Agreement".
Asking the Federal Court to set aside the previous so-called "Settlement Agreement" is not the only relief requested in Nevada's Complaint this week. "Ms. Masto's [the Nevada Attorney General's] complaint asks that the court impose civil penalties on Bank of America and order it to cover the costs of caring for foreclosed properties borne by municipalities." Id.
Standard Poor Credit Rater: It "Might" Make U.S. Rating, "Possible".
Standard & Poor's Credit Rating Corporation never predicted the default of Orange County, California.
Standard & Poor's Credit Rating Corporation did not foresee the collapse of Enron.
Standard & Poor's Credit Rating Corporation failed to predict the Great Collapse of our national economy.
With this rich record, before 2011 Standard & Poor's could have been expected, no, would have been expected, to go and hide its face. Instead, the Very Serious People are continuing to pay attention to Standard & Poor's for some reason. They are in a tizzy that Standard & Poor's has actually made a prediction, which is that there is a 1/3 chance or less that it, Standard & Poor's, will downgrade the Credit Rating of the United States. See generally John Waggoner, "S&P Lowers its Outlook: Could U.S. Default on its Debt?" (USA Today); Michael Hiltzik, "S&P Should Avoid Political Predictions / The Credit Ratings Firm, Which Warned That it Might Downgrade its Assessment of U.S. Government Debt Because Politics Could Hinder Efforts to Control the Deficit, Lacks Credibility in its Forecasts" (Los Angeles Times Online, Saturday, April 23, 2011).
Is this not the same Standard & Poors that is a named Defendant in quite a few lawsuits filed by people and companies that lost lots of money in the Great Collapse?
And, for that matter, is this not the same S&P which is the target of a great deal of focus by the United States Government of S&P's actions and omissions before and during the Great Collapse?
Giving Them "Nationally Recognized Statistical Rating Organizations" Preferences is Socialism!
A post on the Credit Ratings Corporations on Insurance Claims and Issues Web Log on Friday, June 4, 2010 examined the testimony of Mr. Warren Buffett about their cluelessness and blamelessness for the Great Collapse, in his judgment.
The "big 3" of Credit Ratings Corporations are each designated by the Federal Government as "Nationally Recognized Statistical Rating Organizations". Federal Law requires that investors such as mutual funds hold only "AAA" rated investments, rated "AAA" by Nationally Recognized Statistical Rating Organizations". There are and have been only 3 of them: Fitch, Moody's, and Standard & Poor's. Other raters need not apply for this Federally conferred monopoly.
Pending legislation soon to be reconciled between the U.S. Senate and the U.S. House of Representatives may or may not preserve this anti-competitive status for the "big 3". See Joe Nocera, "Dubious Way To Prevent Fiscal Crisis" p. B1, col. 1 (New York Times Nat'l ed., "Talking Business/Business Day" Section, Saturday, June 5, 2010). There may be a new provision which would remove the headlock enjoyed by the 3 NRSRO's, to a situation where high-grade investments can be rated by other raters and not simply by the big 3. Or possibly not rated at all, but proven in some other way to be worthwhile opportunities for investing other people's money.
There is no provision under consideration to totally dismantle Credit Ratings Corporations, or even to limit their free-market potential. Using raters would still be an option if the pending legislation is enacted. S.E.C. Commissioner Kathleen Casey and Prof. Frank Partnoy, "Downgrade the Ratings Agencies" p. 11, col. 1, New York Times Nat'l ed., "Week in Review" Section, Sunday, June 6, 2010). It's just that the stranglehold favoring the Federally enhanced NRSRO's would be broken in favor of competition. As things stand, the big 3 have been given a Federally legislated monopoly position in the many provisions of Federal Law which require their ratings to be used if investments are to be made.
Now that sounds like socialism. It would be useful if people who express concern about Federal government control would express understanding of what is at issue here, and so understanding, strongly oppose this very real example of unwanted mandates.
An Update as to King County, Washington's Federal Court lawsuit against many of the Financial dealers in the Western World, from the post here on May 3, 2010, "Fraud Claims Disguise Fiduciary Breach Claims Only Lawyers Can Describe?"
A similar Federal Class Action Complaint was filed in what became a companion case, by the Iowa Student Loan Liquidity Corporation against the identical Defendants based upon what seem to be the same or similar allegations of Fraud, in Iowa Student Loan Equity Corporation v. IKB, Moody's, McGraw-Hill d/b/a Standard & Poor's, Fitch, et al. (S.D.N.Y. Case No. 09cv08822 Complaint Filed October 16, 2009) .
In an Opinion and Order filed on April 26, 2010, the United States District Judge denied Motions to Dismiss in both Cases, King County and Iowa Student Loan Liquidity Corporation, which were based on arguments that the Complaints failed to state Claims upon which relief could be granted. Download King County, Washington v. IKB, Moody's, Standard & Poor's, Fitch, et al (S.D.N.Y. Case No. 09cv8387, Order Filed April 26, 2010), also published as King County v. IKB Deutsche Industriebank, 2010 WL 1702196 (S.D.N.Y. April 26, 2010) (Westlaw subscription required to access Westlaw). Certain Defendants also made arguments that Dismissal was warranted based on various jurisdictional concerns, which the Federal Court addressed and rejected in a separate Opinion and Order filed on the day before this post, which was May 4, 2010: Download King County, Washington v. IKB, Moody's, Standard & Poor's, Fitch, et al (S.D.N.Y. Case No. 09cv8387, Order Filed May 4, 2010) (not yet reported in Westlaw).
It remains to be seen whether the amendments to the Complaints in these cases will go beyond "negligence" and "negligent misrepresentation" to include alleged Claims for Breach of Fiduciary Duties at Common Law or by Statute.
As we know from today's post, New York Law recognizes a Cause of Action for alleged breach of the implied covenant of Good Faith and Fair Dealing.
Ohio Police & Fire Pension Fund, et al. v. Standard & Poor's, etc., et al.
Following up on my post here on Monday, November 23, 2009, I have located the Complaint in the captioned lawsuit that was filed on Friday, November 20, 2009. It is 77 pages. Here is a pdf copy of the Download Complaint Filed November 20, 2009 . Ohio Police & Fire Pension Fund, et al v. Standard & Poor's, etc., et al (S.D. Ohio Case No. 2.09cv1054).
Ohio Attorney General Complaint: 'Credit Rating Companies' Conflict of Interest'.
The Ohio Attorney General has reportedly filed a 73-page Complaint against several major Credit Rating Companies alleging a conflict of interest. The lawsuit was reportedly filed on behalf of the Ohio Police and Fire Pension Fund, and the Ohio Public Employees Retirement System, and others who allegedly lost money on securities evaluated by the Credit Rating Companies. David Segal, "Ohio Sues Rating Firms for Losses in Funds" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Saturday, November 21, 2009).
Although the report does not mention the claims or causes of action alleged, it seems likely that at least one rests on an alleged Breach of Fiduciary obligations.
Author's Note: I have an EMail in to the reporter of the linked newspaper article, requesting the name of the Court in which the Complaint was filed in order that I can obtain a copy and post it here, if possible. Alternatively, I have asked the reporter to send me a pdf copy of the Complaint if he already has one. Once I obtain a copy of the Complaint in question, when I do I will post it here.
National Association of Insurance Commissioners Nukes Residential Mortgage-Backed Securities Downgrades.
The National Association of Insurance Commissioners ("NAIC") has adopted a resolution proposed by MetLife to reject ratings of certain securities held by Insurance Companies. Recent downgrades by Credit Rating Companies of residential mortgage-backed securities' ("RMBS") credit ratings have resulted in higher Capital or Reserves requirements for the Life and other Insurance Companies which hold these securities. The proposal adopted by the NAIC will cut the Credit Rating Companies loose from further rating of RMBS, and substitute a "third party" potentially more open, you might say, to rating RMBS higher than the Credit Ratings Companies have recently rated them. See Andrew Frye, "Insurers Win Regulator Relief on Home-Loan Securities (Update 3)" (Bloomberg.com, Friday, November 6, 2009).
After inducing a crisis of confidence in the accuracy of their credit ratings, and perhaps even in their competence in the field, Credit Rating Companies are finding it hard to stand up to proposals which have the effect of reducing large amounts of their existing business. If downgrades of RMBS credit ratings have this effect, and clearly they have had this effect, then the Credit Rating Companies face a problem which in many ways, they have made themselves: Either downgrade hopelessly inflated credit ratings on securitized garbage, and lose business, or leave the credit ratings inflated, and lose what little credibility the Credit Ratings Companies still enjoy.
There is a lot to be said in favor of honoring Fiduciary Duties, and not looking away from them. Even for just a little while. Let alone for a very long time.
The proposal is supported by the American Council of Life Insurers.
It is opposed by the Center for Economic Justice.
Perform Fiduciary Duties, Not Just Regulate the Financial System.
Fixing the Financial System is not what the current Administration is about. Making new Regulations of the same people doing the same thing they did before is the President's own definition of insanity: Trying the same thing over and over, and expecting a different result.
Credit Rating Companies for example failed miserably to evaluate the credit of Munis (Municipal Bonds), of Bond Insurance Companies, and other things. Yet, the right fix is not on, yet: The House Financial Services Committee and the Obama Administration are pushing legislation that would have the purpose of better regulating the Credit Raters. However, the legislation would avoid addressing the central Fiduciary conflict that Credit Rating Companies had and still have: They are paid by the people whose credit they rate. Until that is changed, everything may be changing, but nothing is new, to quote an old saying. On the pending legislation, its avowed purposes, and its drawbacks, see Joe Nocera, "Talking Business/CliffsNotes of Columns to Come" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, October 31, 2009).
Similarly, the Obama Administration and particularly Treasury Secretary Timothy Geithner are pushing other legislation also designed to keep the old financial system intact. They want to have the same people who failed to stop the Great Meltdown hold down new regulating jobs in a new government agency, to regulate the same people who ran amok with the financial system in the first place. See Stephen Labaton, "A Clash Over Regulation of Big Firms" p.B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Friday, October 30, 2009), published online under this different headline: "F.D.I.C. Chief Criticizes Reform Plan".
Fiduciary Duties require more than just tinkering at the edges, as they say. The American people are the ones owed those Fiduciary Duties, not the temporary occupants of the Federal Government and certainly not the wealthy people who already failed. It is a good time to fix the problem, not just invent new regulations and expect them to be enforced by the same people who failed at enforcing the old ones.
Credit Rating Companies and Fiduciary Duties.
[A] better approach would be new legislation that makes clear that the ratings agencies owe the fiduciary duty of care and loyalty to their investor clients. That doesn't mean they can be sued any time an investment goes sour. What it does mean is that they would be liable if they put out a rating that they knew, or should have known, was misleading after taking reasonable steps to ascertain that the information provided to them was accurate.
Steven Pearlstein, "Missing the Mark on Ratings-Agency Reform" (Washington Post Online, Friday, September 18, 2009). This is well said. The Courts have also spoken well. They have imposed Fiduciary Duties recognized at Common Law in many respects on persons and entities in the position of Credit Rating Companies. These persons and entities have, however, often defended on the ground of immunity conferred by Congress and with a defense that their paid pronouncements are 'protected' by the First Amendment to the United States Constitution.
Perhaps against this background, new Federal legislation also imposing Fiduciary Duties may well be welcome in this area.

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