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Tuesday, March 06, 2007 12:16 AM

Avalanche of Lawsuits

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Lawsuits are springing up everywhere. For a typical example, please consider the March 4th article in Arizona Republic concerning Litigation Over Mortgage Schemes.

Dozens of civil lawsuits alleging the gamut of mortgage fraud, from cash-back deals to lying about income on loan documents, have been filed against Valley firms and individuals during the past few months. Fraud experts and regulators say the lawsuits are only the beginning as the fallout from mortgage fraud starts to hit the Valley. Cash-back scams involve getting a mortgage for more than a home is worth and pocketing the extra money. The deals inflate home values and leave lenders with losses from loans worth far more than the house itself.

"Banks are going to force mortgage brokers to buy back bad loans, and mortgage brokers don't have the money so they are going to go under," said Richard Hagar, a national mortgage and real estate fraud expert with American Home Appraisals based in the Seattle area. "This is the beginning of the wave of lawsuits, lost licenses and criminal indictments in Arizona."

The Beginning Wave
  • Phoenix-based Biltmore Bank is suing Security Title of Arizona and a group of others over a cash-back deal. The suit alleges the group worked together to get Biltmore to fund a $1.3 million loan for a home valued at $800,000 and then pocketed the extra cash.
  • A Lehman Brothers investment trust in New York and Aurora Loan Services in Denver are suing the parent company of First National Bank of Arizona over 38 home loans. They say the bank misrepresented the values of properties, and the income, debt and employment of some of the borrowers. Lehman and Aurora bought the loans as investments and want the bank to buy them back.
  • San Francisco-based Transnational Financial Network is suing Phoenix-based Lending House Financial and a Scottsdale investor who purchased 22 Valley homes within days of each other last spring. Transnational funded loans worth nearly $2 million on seven of the homes but says it wasn't notified the investor was buying multiple properties and his real debt level wasn't disclosed on mortgage documents.
  • Tucson-based mortgage lender First Magnus is suing its former Valley loan officer, Tyson Rondeau, for fraud and negligence. First Magnus claims bad loans are costing it nearly $1 million.
Class Action against NovaStar

FindLaw is reporting Dreier LLP Files Class Action Lawsuit Against NovaStar Financial.
Dreier LLP announced that a class action lawsuit was commenced in the United States District Court for the Western District of Missouri, on behalf of purchasers of the common stock and/or call options and/or sellers of put options of NovaStar Financial, Inc. ("NovaStar" or the "Company") during the period May 4, 2006 through February 20, 2007, inclusive (the "Class Period"). The complaint alleges violations of the federal securities laws, including Section 10(b) of the Securities Exchange Act.

The Complaint alleges, among other things, that: (i) NovaStar's reported financial results during the Class Period were falsely inflated; (ii) Defendants misrepresented the quality of the Company's mortgage loan portfolio and its ability to pay dividends; (iii) Defendants failed to disclose that the Company's reported financial results and projections were based upon faulty assumptions because of inadequate internal controls; and (iv) Defendants failed to disclose that the Company lacked a reasonable basis to make projections regarding its ability to maintain its status as a REIT. The Complaint further alleges that, as a result of these false statements and omissions, NovaStar's securities traded at artificially inflated or distorted prices. On February 20, 2007, after the close of trading, NovaStar shocked the market by announcing disappointing fourth quarter and year end 2006 financial results and warning that the Company expected to make very little, if any, REIT taxable income for the next four years. In reaction to this news, the price of the Company's stock declined more than 30% on extremely high trading volume. The Plaintiff seeks to recover damages on behalf of all members of the proposed Class.
Class Action against New Century Financial

Market watch reported Brower Piven Announces Class Action Lawsuit Against New Century Financial.
The law firm of Brower Piven, A Professional Corporation, today announced that a securities class action was commenced on behalf of shareholders who purchased or otherwise acquired the common stock of New Century Financial Corporation between April 7, 2006 and February 7, 2007, inclusive (the "Class Period").

The action charges that defendants violated federal securities laws by issuing a series of materially false and misleading statements to the market throughout the Class Period, which statements had the effect of artificially inflating the market price of the Company's securities.
$77 billion in claims in New Orleans

The Times-Picayune is reporting N.O. asks whopping $77 billion in claim to corps.
Submitting a claim for a staggering $77 billion, the city of New Orleans joined tens of thousands of would-be plaintiffs who rushed to beat a Thursday deadline to alert the Army Corps of Engineers that they may sue for losses resulting from the levee breaches after Hurricane Katrina.

Also joining the queue were Entergy New Orleans, the city's bankrupt electrical utility, which is seeking $655 million, and the New Orleans Sewerage & Water Board, which put in a claim of about $460 million, spokesmen for the agencies said.

While they are likely to be among the largest filed, the three claims became part of an avalanche of paperwork that poured into the corps' Leake Avenue headquarters as Thursday's 11:59 p.m. deadline approached, corps personnel said.

By the time of the morning commute, cars already had clogged the two-lane River Road and miles of connecting arteries. The miles-long traffic jam got so thick that the federal agency established satellite pick-up points on Carrollton Avenue and Magazine Street.

"We took people out of offices to help out: engineers, lawyers, secretaries, you name it," spokesman Chris Accardo said. "At one time, we might have had 50 people out there."

Hours before the cut-off time, enough bags and boxes of claim forms had arrived to fill an 8-by-10-foot room, corps spokeswoman Kathy Gibbs said.
Litigation Nightmare

In June of 2006 in Litigation Nightmare & Heartbreak Hotel I mentioned a 12 point list of lawsuit items.

Litigation Items
  1. Buyers suing developers for non-performance
  2. Developers suing speculators for flipping properties in violation of contracts
  3. Subcontractors suing developers for non-payment
  4. Subcontractors suing general contractors for non-payment
  5. Class action lawsuits against single family homebuilders and condo developers for faulty roofing, HVAC, electrical, and plumbing systems
  6. Lawsuits against inspectors for not catching code violations
  7. Condo boards and individual homeowners suing developers for shoddy work
  8. Lawsuits against appraisers for inflated values
  9. Lawsuits against banks when project fundings are halted
  10. Lawsuits over completed condo units being substantially different in size, interior finishings, and quality than how they were represented pre-construction
  11. Lawsuits by anyone and everyone against anyone and everyone over various fraud allegations
  12. Of course we can’t forget counter suits by anyone and everyone against anyone and everyone over anything and everything
Judging from Morgan's lawsuit vs. Lennar, various recent class action lawsuits against prominent subprime lenders, and "Dozens of civil lawsuits alleging the gamut of mortgage fraud, from cash-back deals to lying about income on loan documents" (the latter just in the state of Arizona alone), it is safe to say that a fresh wave of litigation has started.

Things appear to be just as Richard Hagar of American Home Appraisals suggests: "This is the beginning of the wave of lawsuits, lost licenses and criminal indictments." The key word in that sentence is "beginning". The avalanche has a long way to slide before we can even begin to think it is approaching the bottom of the hill.

This post originally appeared in Whiskey & Gunpowder.

Mike Shedlock / Mish

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