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Monday, July 22, 2024 | Back issues
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Suit After Saddled With Bad Chase Mortgages

MANHATTAN (CN) - A Florida man who bought defaulted home loans from J.P. Morgan Chase, then worked with borrowers to avoid foreclosure, sued the bank for allegedly saddling him with bad mortgages it needed to get off its books as the country's housing crisis deepened.

Laurence Schneider, of Boca Raton, filed the suit for punitive damages on Christmas Eve in New York County Supreme Court. J.P. Morgan Chase & Co., subsidiary J.P. Morgan Chase Bank NA, and mortgage servicer Chase Home Finance, which merged with the subsidiary in 2011, are all named as defendants. He says their fraud, breach of contract, defamation, racketeering and other offenses "destroyed" his businesses.

For years, Schneider's two businesses in suburban Coconut Creek, Fla., purchased hundreds of first- and second-lien residential mortgages from Chase, according to the 69-page complaint.

Repayment plans that the Schneider businesses, S&A Capital Partners Inc. and 1st Fidelity Loan Servicing, worked out on the defaulted loans allowed borrowers to stay in their homes and rebuild their credit. Schneider says his businesses, named as plaintiffs, stayed afloat by increasing the value of the loans above their purchase price.

Schneider's third business, Mortgage Resolution Servicing, is also named as a plaintiff. He says it was created to purchase a large pool of loans - more than 3,500 - that Chase wanted to get off its books.

According to the complaint, S&A Capital and 1st Fidelity began working with Chase in 2005 and earned praise from the company.

"Relying on Chase for their supply of loans ... 1st Fidelity and S&A built strong portfolios with high levels of recovery on the residential mortgage loans they purchased, while preserving opportunities for thousands of homeowners to remain in their homes and rebuild their credit," the complaint states. "In short, S&A and 1st Fidelity's business model was able to achieve results that Chase could not."

Trouble began to surface in 2008, though, when Chase allegedly proposed to sell Schneider a pool of loans that it had decided would be more costly to foreclose than to sell.

Although at first hesitant because many of the loans on the list lacked basic data needed to begin servicing them, Schneider says he finally agreed in early 2009 to purchase 3,529 loans with an outstanding principal balance of $156 million.

Many of the loans were problematic because Chase had failed to service them properly, according to the complaint. Regulators worried about the then-mounting residential mortgage crisis allegedly increased their scrutiny in turn.

As Chase acquired EMC Mortgage Corp. and Washington Mutual-Henderson in 2008, it brought on even more problem loans and the potential for greater regulatory scrutiny, the complaint states.

Chase then looked for investors "to be the sacrificial lamb" and "targeted Mr. Schneider as a scapegoat onto whom Chase sought to offload loans that posed serious problems," according to the complaint.

Schneider contends that the government's response to the mortgage crisis - launching homeowner-assistance programs as part of the multibillion-dollar American Recovery and Reinvestment Act of 2009 - pressured Chase to dump more and more problem loans into a "no man's land of the bank" where the loans are not serviced and "the associated borrowers are mishandled to the point where compliance with any regulatory requirements became impossible."

The complaint describes the Recovery One System, or RCV1, as "a hidden secondary system of records that Chase maintained outside of its primary system of records."

Schneider says the pool of loans sold to Mortgage Resolution Servicing came from there.

Chase also tried to reduce its problem loans under what internally was called an "alternative foreclosure program," through which it filed satisfactions of mortgages "without any notice to any interested parties (including the current holders of the mortgages!) and with callous disregard for the multitude of damages those acts cause," the complaint states (emphasis and parentheses in original).

Schneider says his businesses thus became entangled "in ongoing disputes with borrowers and governmental agencies with whom the Schneider entities previously enjoyed positive working relationships."

"Chase's misconduct harmed the Schneider entities' reputation by effectively portraying the Schneider entities as predatory businesses attempting to collect payments on loans that had been forgiven or released, when, to the contrary, the Schneider entities only took action to which they were legally entitled as the rightful owners of the loans at issue," the complaint states.

In addition to special and punitive damages, Schneider seeks to block from discharge any more loans it purchased from Chase, and to make Chase provide the missing data long promised on the pool of loans sold to Mortgage Resolution Servicing.

Gary Eisenberg of Perkins Coie in Manhattan represents Schneider.

A Chase spokeswoman did not return an email seeking comment.

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