From my work defending mortgage loan originators, including many homebuilder captives, against mortgage repurchase and indemnification claims, as well in my role as an editor of Bilzin Sumberg’s Mortgage Crisis Watch, I have seen a wide array of “loan level” claims asserted by the GSEs and the big bank aggregators against originators. In the vast majority of cases, the claims relate to alleged acts or omissions by borrowers and/or originators (ie, the disputes do not implicate issues outside of the mortgage company and its business operations).

Although one might take the view (as I do) that from the beginning, essentially all of these claims are nothing more than attempts by the GSEs and the aggregators to revise the history of the housing debacle, the demands I have recently encountered are becoming increasingly frivolous. It was one recent demand in particular that was asserted against a captive mortgage company of a homebuilder that caused me to reflect generally on the relationships between homebuilders and their affiliates.

Interconnectivity: Beware of Decisions Affecting Affiliated Entities

In that instance, a “too big to fail” bank had recently notified the captive mortgage loan originator that the mortgage insurance (“MI”) company that had insured a particular loan withdrew its coverage, on the basis that it had determined that there was defective Chinese Drywall used in the construction of the underlying residence. While I viewed the claim against the mortgage company to be contractually and otherwise weak for multiple reasons,  the captive mortgage company considered reaching out to its homebuilder affiliate about providing loan level information in order to attempt to specifically rebut the drywall claim (without knowing whether or not there might actually have been a dry wall problem). However, if there really was an issue, providing the information could potentially have affected multiple loans and possibly could have created exposure to the homebuilder). Fortunately, it was early on in the process and I suggested that we use other means to dispute the matter.

The point, of course, is that particularly in the case of a captive mortgage company whose business is so closely connected to its builder’s unit sales, issues may arise that involve more than just one company in the group, and might even affect the companies in markedly different ways. We suggest that mortgage and homebuilding professionals be on the alert for potential issues of this type.