ResCap Taking Repurchase Fight to Courts

A division of Residential Capital, LLC has been relatively active so far this year in suing lenders that once sold it loans that it now says are fraudulent and strewn with misrepresentation; Housing Wire explored the cases after an earlier story in the Minneapolis Star Tribune had suggested that ResCap’s Residential Funding Co. was “suing brokers” for loan repurchases. The claim that brokers were being sued caught the attention of more than a few industry participants, not to mention our own editors; but our review suggests the Tribune misused the word “broker” in describing outstanding litigation. More than 15 cases have been filed by Residential Funding this year against lenders that sold it loans under a repurchase agreement, most against the sort of small mortgage banking operations that were common during the boom. Contrary to the claims of an August 9 story in the Tribune, none of the cases are repurchase suits seeking recovery from third-party brokers; all involve existing repurchase agreements ResCap had in place with various residential and commercial lenders. Many of the cases involve firms that have already filed for bankruptcy or are now out of business, including Florida-based Paramount Financial, Inc. and California-based Home Loan Funding, Inc., two lenders that specialized in subprime lending. A search of the internet archival service www.archive.org shows that Paramount’s website went offline in late November of last year, while Home Loan Funding’s website went offline in early January of this year. Other cases involve firms that filed for bankruptcy right before ResCap’s lawsuit materialized, including California-based EquiPoint Financial Network, Inc. RFC filed suit against EquiPoint for more than $2 million in repurchase claims on July 16 in Minnesota District Court. On July 10, Equipoint had filed Ch.11 bankruptcy in California’s Southern District bankruptcy court. All repurchase suits against residential lenders involve claims that the lenders materially misrepresented occupancy, income, and the like; experts tell HW such suits are common and like to become moreso as the mortgage mess goes on. Residential construction loan lawsuits favor much more prominently, however, at least in terms of dollar figures. In one such lawsuit filed on June 13, ResCap is suing Arizona-based Elite Homebuilders, Inc., a small homebuilder in the state, over a $30 million construction loan. ResCap claims it is still owed $17.8 million (plus interest) on the defaulted note after the builder — like many small builders — saw its project blow up earlier in the year. On July 16, RFC filed suit against real estate mogul Bernard Glieberman, who is the president and sole shareholder of Crosswinds Communities, a large privately-owned residential building and development company. ResCap is looking for $52.3 million in the case, tied to six different development projects with the company. Taken together, the cases make it clear that at least one major financier isn’t waiting to go after recovery wherever it can in distressed loans; and with losses mounting at Rescap — the company lost $1.86 billion during the second quarter — it’s likely more cases will be forthcoming.