Aaron Krowne’s legal battles as owner of the Mortgage Lender Implode-O-Meter against Loan Center of California have gained significant media attention lately. The story appeared on blogs, the L.A. Times, American Banker (no link), Inman News (subscription) and other prominent industry web sites this week. Many have voiced their support of the Implode-O-Meter and their right to continue publishing industry news and information - including mortgage companies that are ailing or deceased.
Here at Blown Mortgage we’ve been a large champion of ML-Implode’s simply because a defeat for them would be a defeat for all small web site operators. Anyone who operates a blog or a web site expressing an opinion would be in the precarious situation of having legal precedent looming over their head with every post or update. Any well capitalized organization could use this case to silence opposing view points expressed online. Dangerous is not a strong enough word to describe an environment such as this. For more on our thoughts on the matter please read more here.
What I wanted to discuss today is my personal opinion of why I think the LCC suit against ML-Implode has some serious flaws with respect to the charges they make in the case. These are strictly my opinions based on my experience in the mortgage banking industry and that experience with respect to the claims made by LCC in their suit. I cannot say that these events didn’t transpire against LCC but in my experience they seem highly unlikely. Let’s take a look at some of the charges LCC makes (PDF):
Representatives of Washington Mutual and Credit Suisse, two warehouse lenders, by contract, provide funding for some of LCC’s mortgage loans, saw the false information published by Defendants on the websites and withdrew approximately $3,800,000 from LCC’s bank accounts on that same day, which equates to approximately 75 percent of LCC’s cash on hand at the time.
My company is an approved Correspondent Lender with Countrywide, Impac, and other companies. As an approved correspondent lender we go through recertifications with these lenders on a periodic basis to ensure that we remain in good standing with those companies based on our lender agreements we’ve signed with them. Here are some of the items that these banks request of us at recertification time:
- Audited financial statements
- Proof of acceptable net worth and tangible assets
- Proof of cash on hand
- Updated production numbers
- Any significant changes to staffing and personnel
- Most recent quality control report
- Most recent management response to quality control report
- Report of any loan buybacks, early payment defaults, etc.
- Report of any financial or legal issues that may affect the company
That is all information that these banks want on a regular basis. Based on this recertification process it would appear to me that creditors such as Washington Mutual and Credit Suisse would take an approach similar to our creditors; using the above due diligence (and other information) to make a decision about whether to extend credit to or revoke from a lender. It seems highly unlikely that Washington Mutual or Credit Suisse would eschew much more important, verified and relevant information as to the health of LCC (such as the above) in favor of rumor posted on a web site.
I would expect under our agreements with our creditors that they would call us to verify our business state and perhaps ask for certified financial statements, proof of liquid reserves and more information prior to making a decision to completely withdraw our capability to fund loans. It would seem highly uncharacteristic of well established business to act in such an erratic fashion. On the other hand, a WaMu or Credit Suisse representative reading a rumor on a web site, picking up the phone, talking to an executive and asking for some verifications disproving the statement seem more reasonable. Even a temporary suspension of the lines pending proof of liquid reserves or other information per their agreement with LCC seems more likely steps than simply “pulling” money.
Similarly, with respect to each creditor’s due diligence in making this decision it seems unlikely that both would draw the same conclusion to pull funding on the same day in response to the same stimulus - an industry-rumor web site. Again, this is based on my experience only.
Based on my experiences with warehouse creditors that any decisions made by WaMu and Credit Suisse would be based on a combination of factors that put LCC in default of lending agreements it signed with their creditor; and not the posting on ML-Implode. Unless the agreements have burried in them “Don’t appear on any mortgage related personal opinion web sites as being in less-than-good standing.” If that is the case I need to comb through mine more carefully.
Another LCC charge:
In addition, many mortgage registrations regarding ownership and servicing rights to LCC’s loans were changed from LCC to Washington Mutual through the Mortgage Electronic Registration Service.
LCC basically mentions this because they are unable to sell loans that are not theirs to sell. It would be interesting to learn of how fast the transfer took place, why it could not be stopped, and how long those loans were held as registered to WaMu after this “misunderstanding” was cleared up. Were loans transferred after ML-Implode had retracted its statement the same day or were they done within the few short hours the information was on the site? What was the real damage suffered here? Did they lose pricing premiums or rate locks based on their inability to sell these re-registered loans? What was the material financial impact of this action?
Another LCC charge:
Washington Mutual also temporarily withdrew its approval of LCC as an approved lender.
Obviously again the question has to be raised what was the time frame of this temporary suspension? 4 hours, 3 days, 2 weeks? What was the financial impact of this temporary suspension. Our company has been temporarily suspended by lenders in certain states pending proof of insurance or licensing that has slowed our company down for a day or less. It is a definite head ache when you attempt to fund loans and find out that the title company office is not an approved funds recipient, or the bond renewal has not been forwarded to the correspondent lender approval department and a loan can’t fund. Those types of issues are usually cleared up quickly and have minimal impact on operations.
The last of LCC’s charges:
Further, other lenders have required LCC to repurchase loans based upon the information obtained from the Websites. These actions occurred as a direct result of the false information published on the Websites.
I find this exceptionally hard to believe for several reasons. First and foremost while LCC may have been forced to buy back loans from investors it is most likely not due to the implosion notice on ML-Implode. Could an investor read the material on ML-Implode and request an audit of LCC’s loan files or a report on loan performance and take action from there? Absolutely. But loan repurchases are not something that happen quickly. A file has to be sent back for a definitive reason under the provisions of the agreement signed between the seller (LCC) and the buyer (the investor). These provisions call for loan buybacks for reasons such as:
- Fraud
- Early payment default
- Underwriting outside of investor guidelines
- Other quality control issues
There are many other reasons, however in my experience these reasons all have to do with the quality of the loans themselves - not with the health of the seller (LCC). If LCC had loan buybacks it was most likely not because they appeared on ML-Implode; its because there was something with those loan files that made them eligible for repurchase based on the agreements they signed. At least, that is how it works between us and our end investors. I imagine our agreements are fairly standard and customary for the mortgage banking industry.
Further, if LCC has loan buybacks they have every right to dispute the buybacks. They can use their legal team to scour their investor agreements and find the language that excludes those loans from being eligible for buyback. It can take months to settle buyback claims on loans. I find it hard to believe that LCC would not fight just as diligently against loan buyback charges as they have against ML-Implode. As a mortgage banker we invest our legal resources in reviewing our seller/investor contracts to protect us against frivolous buyback claims - I imagine LCC’s legal staff used the same due diligence in reviewing their repurchase agreements.
Again this is just my opinion but it seems highly unlikely that LCC would suffer loan buybacks as a direct result of a web site posting and not of something more significant in regards to the loan files under question.
This analysis is purely based on my personal experiences in the mortgage banking arena and are not based on the actual events that did or did not occur to LCC based on the web site posting on ML-Implode. In the end it seems that based on my experience the alleged swift actions taken by the parties that damaged LCC’s business (WaMu, Credit Suisse, Loan buybacks) seem uncharacteristic based on my understanding of the mechanics of each action in question.
I hope that this information helps you to understand why I believe a grave disservice is being done to bloggers and web site owners everywhere by allowing this case to proceed. I believe the claims made by LCC about damage to its business result from business activities and decisions made by LCC; not the mere posting of a single email on a personal web site.
Please continue to support the ML-Implode cause to protect freedom of expression, freedom of opinion and freedom of speech.
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[Source: Blown Mortgage]
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