FREE Three-week trial of Asset-Backed Alert's newsletter
Jilted DLJ Goes After Subprime Lenders
Asset Backed Alert, Harrison Scott Publications Inc. (March 23, 2007)
A Credit Suisse unit is separately suing three subprime-mortgage lenders for more than $30 million, claiming the shops turned their backs on loans it purchased from them.
In two of the lawsuits, against Sunset Direct Lending and Infinity Home Mortgages, New York-based DLJ Mortgage Capital is seeking to force the defendants to repurchase credits that ran into trouble soon after it bought the asssets in transactions that took place more than a year ago. DLJ is looking for almost $24 million of buy-backs from Sunset, and $3 million from Infinity.
DLJ also claims NetBank owes it $4 million for failing to pass along payments and information on loans that the Alpharetta, Ga., company and its Market Street Mortgage and Meritage Mortgage subsidiaries continued to service following similar sales.
DLJ filed all three lawsuits separately over the last three months, in U.S. District Court in New York. The operation routinely funds loan purchases through securitization, although it's unclear if the Sunset, Infinity and NetBank credits back any of its bonds.
It's believed that the portfolios encompass both prime-quality and subprime assets.
In the Sunset and Infinity cases, DLJ accuses the lenders of reneging on promises to repurchase loans at full value if the underlying borrowers fell more than 30 days past due within three months of the portfolio sales. DLJ also wants Lake Oswego, Oregon-based Sunset to give it $90,000 of compensation for loans that were paid off within a year.
It's common practice for lenders who sell their mortgages as whole loans to buy back credits that don't perform as expected from the start. Over the last six months or so, however, mounting loan-performance problems have forced a growing number of cash-strapped finance shops to violate those so-called representations and warranties.
As a result, players in the securitization business expect lawsuits similar to DLJ's to flood the courts in the coming months, as subprime borrowers who took out new home loans in 2005 and 2006 default in greater numbers and much earlier than anyone expected. In many cases, the buyers of the loans were top investment banks that then packaged the cashflows into asset- and mortgage-backed securities - a strategy employed by the likes of Credit Suisse, Lehman Brothers and Bear Stearns.
For its part, Infinity claims it owes nothing because DLJ mishandled the loans after buying them and failed to correct billing errors even after they were pointed out.
In court papers filed Feb. 21, the Cherry Hill, N.J. lender said DLJ's "failure to timely send bills to the borrowers or credit payments from the borrowers caused the appearance of late or non-payment, thus falsely triggering the repurchase clause." Infinity also noted that the borrowers involved have made their subsequent payments on time.
What's more, Infinity disputes that it's responsible for an inflated appraisal on one Newark, N.J., property that secures two loans it wrote in December 2005. DLJ wants Infinity to pay it back for the $427,500 owed on those mortgages. But Infinity said DLJ should go after the original appraiser instead.
In the NetBank case, DLJ charges that the lender failed to forward borrower payments and neglected to pay for primary mortgage insurance on loans when it was required to do so. DLJ also complains that NetBank refused to comply with numerous requests for information about the unpaid accounts and proof of mortgage insurance.
In addition, DLJ wants NetBank to cover damages that could result from a separate lawsuit filed by a borrower in Texas. NetBank has apparently refused to cooperate in the defense, even though the ongoing case pertains to its servicing of the customer's loan.
Like Infinity, NetBank blames negligence on DLJ's part for problems with its loans, according to court documents filed Feb. 12.
So far this year, DLJ has issued $3.6 billion of bonds secured by loans to prime-quality mortgages. It has also completed almost $3 billion of transactions tied to subprime mortgages and home-equity loans, according to Asset-Backed Alert's ABS Database.