Big Banks’ Demand on Originators

I’d be hard-pressed to find a lawyer who did not learn in his or her first weeks of law school that “causation” is a fundamental element of contract claims and legal liability. They tell me that if a butterfly flaps its wings in one part of the world, it can cause a hurricane in another part of the world. So, yes, we learn from the poetic back-and-forth of our great justices that “proximate cause” must always play a role – that there must be some clear connection between the alleged wrong and the harm suffered. Makes sense. But, of course, what makes sense only works for Wall Street when it works in their favor.

In the mortgage repurchase world, we see countless instances where the big bank demands an originator “repurchase” a bad loan, yet the alleged breach cited by the bank has nothing to do with the cause of default. For example, a bank will claim that undisclosed debts require repurchase of a certain mortgage loan, but we find that the borrower made payments for years before losing their job. We forcefully point out this disconnect by the banks. They tend to ignore this fundamental issue, or, worse, take the highly dubious position that causation should not be a defense against a “repurchase” demand.

Apparently unfazed by its self-contradiction, however, Countrywide Financial (now owned by Bank of America) invoked this exact defense against MBIA in that company’s ongoing repurchase lawsuit against Countrywide. In other words, Countrywide claimed that MBIA must show proximate cause – that MBIA’s losses were caused by something Countrywide did, rather than just being the result of risks inherent to contracts they signed.

Is it too much to hope that Countrywide has now seen the error of its ways, and will thus cease claiming to originators that causation need not be proved?

Sadly, the answer is almost certainly yes, it is too much to hope for consistency from Countrywide.