The Residential Mortgage-Backed Securities Working Group officially filed its first mortgage fraud lawsuit, going after JP Morgan Chase investment bank. According to the complaint, JP Morgan is allegedly responsible for a long list of fraudulent activity in relation Bear Sterns’ packaging and sales of mortgage securities.
The civil lawsuit was filed in the New York State Supreme Court against Wall Street investment bank Bear Stearns. Purchased by JPMorgan in March 2008, Bear Stearns effectively became part of the JP Morgan Chase group.
Bear Stearns and their leading unit, EMC Mortgage, are accused of mortgage fraud through defrauding investors who bought mortgage securities from the companies from 2005 through 2007. The banks allegedly “kept investors in the dark” when it came to the quality of their loans. They also neglected to reveal evidence of widespread defects within the loans they held and sold to investors.
Are you aware of a company committing mortgage fraud? If so, contact a Berger Montague qui tam attorney today.
Fraudulent Activity Within Bear Stearns
The mortgage fraud lawsuit filed by the Residential Mortgage-Backed Securities Working Group alleged that investors with both Bear Stearns and EMC Mortgage purchased securities backed by bad mortgages. Due to poor oversight and quality control on behalf of the mortgage companies, thousands of unqualified borrowers were approved for home loans. As a result, high-dollar mortgages were granted to low-income applicants that never had the means to repay them. In the end, a vast majority of these bogus mortgages ended up in default.
Bear Stearns allegedly led their investors to believe that the mortgage loans were being meticulously analyzed and evaluated on an individual basis. In reality, there were little to no quality control protocols in place. Mortgage loans that were destined to default were being approved at a mind-boggling rate.
The official complaint read:
“Rather than carefully reviewing loans for compliance with underwriting guidelines, the defendants instead implemented and managed a fundamentally flawed due diligence process that often, and improperly, gave way to originators’ demands.”
In theory, if Bear Stearns were to become aware of certain problematic mortgage loans that they agreed to purchase, they were supposed to make the loan originator buy them back. In truth, the firm allowed loan originators to settle their bad home loans behind closed doors “by making cash payments that were a fraction of the contractual repurchase price,” according to the lawsuit. Instead of following the rules and regulations, Bear Stearns took cash payments from the lenders and kept them, never passing that money on to their investors.
Formation of the Residential Mortgage-Backed Securities Working Group
This particular lawsuit differs from many of the mortgage fraud cases filed by regulators like the Securities and Exchange Commission. The Residential Mortgage-Backed Securities Working Group task force’s lawsuit does not hone in on one particular instance of mortgage fraud or one person’s role in the scheme. Instead, this mortgage fraud case alleges that the fraudulent activity was rampant throughout the entire institution and ended up causing damage to multiple deals during a specified time period.
The Residential Mortgage-Backed Securities Working Group was formed at the request of President Obama in response to the 2008 housing loan crisis. Obama reached out to Attorney General Eric Holder, asking him to create a special unit whose purpose would be to investigate mortgage fraud, shady lending practices, and risky loans being packaged and sold to unsuspecting investors.
The Residential Mortgage-Backed Securities Working Group task force is made up of the Justice Department, the Securities and Exchange Commission, the Department of Housing and Urban Development, and the Internal Revenue Service. It is spearheaded by New York Attorney General Eric Schneiderman and Colorado U.S. Attorney John Walsh.