On May 2, MBIA Insurance Corporation announced that it reached a settlement with Flagstar Bank in its lawsuit arising out of $1 billion in Flagstar-sponsored MBS that MBIA insured. MBIA sued Flagstar for breach of warranty under the insurance agreements, breach of the repurchase protocol, material breach of the insurance agreements, and reimbursement. MBIA alleged that representations and warranties made by Flagstar about the insured mortgage loans and about Flagstar’s operations and quality-control procedures were false. Under the terms of the Settlement Agreement, MBIA will receive $110 million in cash and other consideration in return for termination of the pending lawsuit. Press Release.
On Wednesday, June 6, 2012, Judge Barbara R. Kapnick granted the motions of the Attorneys General of the states of New York and Delaware to intervene in the proceeding to approve the $8.5 billion settlement between Bank of America and investors in certain Countrywide MBS. Both Attorneys General previously had been allowed to intervene in related federal court proceedings. The case was subsequently remanded to state court, where the New York and Delaware AGs again sought to intervene. In granting the motions over the objection of the trustee for the MBS trusts and certain institutional investors, Judge Kapnick found that the Attorneys General had “identified legitimate quasi-sovereign interests at play in this Proceeding,” and that the intervention would not result in undue delay. Order.
On May 25, 2012, Residential Capital LLC (“ResCap”) filed a complaint in United States Bankruptcy Court for the Southern District of New York seeking declaratory and injunctive relief to extend the automatic stay over 27 MBS lawsuits against it, its affiliates, and its executives while it undergoes bankruptcy restructuring. ResCap alleges that all of the lawsuits against its non-debtor affiliates are inextricably connected to the debtor affiliates, and that such lawsuits will drain the debtors’ estates by forcing those entities to undergo extensive discovery and face significant indemnification claims by their directors and officers. ResCap also alleges that by allowing the lawsuits to proceed, ResCap will face significant risk of collateral estoppels and evidentiary prejudice. Complaint.
On April 30, 2012, the United States Court of Appeals for the Second Circuit affirmed a lower court’s denial of class certification in two putative class action lawsuits brought by New Jersey Carpenters Health Fund and Boilermaker Blacksmith National Pension Trust against Goldman Sachs and the Royal Bank of Scotland, respectively. The pension funds asserted claims under Sections 11, 12, and 15 of the Securities Act of 1933 for purported misrepresentations and omissions in various MBS offerings. In a non-precedential summary order, the Second Circuit held that the court below had used the correct standard in finding that the suits will require individualized inquiries into plaintiffs’ knowledge of the alleged misstatements or omissions and therefore declined to certify the proposed classes as defined. Decision.
On March 9, the SEC approved an amended proposed rule change, allowing the Mortgage-Backed Securities Division of the Fixed Income Clearing Corporation to provide guaranteed settlement and central counterparty services. SEC Release.
On February 7, Andrew Davidson & Co., Inc. hosted a roundtable discussion in Washington, D.C. on the topic of credit risk sharing by the GSEs. Participants representing a broad cross-section of the mortgage market discussed, among other things, the ways in which private capital can be invested in mortgage credit risk to provide protection to the taxpayer while the GSEs continue to provide liquidity for conforming MBS.
Summary of the roundtable discussion.
On February 1, the SEC issued a no-action letter to PNC Bank relating to Rule 15Ga-1 which, pursuant to Section 943 of the Dodd-Frank Act, requires ABS securitizers to disclose repurchase requests. The SEC indicated that it will not recommend enforcement action against a securitizer that does not file repurchase request disclosures with respect to Ginnie Mae MBS under certain circumstances. SEC No-Action Letter. Incoming PNC Request.
On December 5, 2011, lead plaintiff Public Employees’ Retirement System of Mississippi moved in the Southern District of New York for approval of a $315 million settlement with Merrill Lynch. In the class action lawsuit, plaintiff asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, alleging that Merrill Lynch misrepresented the quality of the subprime mortgages underlying 84 different RMBS offerings. The proposed settlement was entered into after discovery had begun and following decisions of Merrill Lynch’s motion to dismiss and Plaintiff’s motion for class certification. Motion.
On September 15, 2011, Southern District of New York Judge Laura Taylor Swain granted in part Morgan Stanley’s motion to dismiss claims in a putative class action by MBS investors that Morgan Stanley violated Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs allege that Morgan Stanley made material misrepresentations regarding its ratings and the appraisals and underwriting standards of the underlying mortgages in the marketing and sale of the MBS. Judge Swain found that Plaintiffs failed to sufficiently allege any facts supporting any misrepresentation regarding the derivation or integrity of the MBS ratings or that Morgan Stanley had a duty to disclose any alleged underlying flaws in the ratings process. Judge Swain found that Plaintiffs’ allegations regarding the appraisals and underwriting standards were sufficient and denied the motion to dismiss with respect to those claims. Decision.
On September 13, 2011, Central District of California Judge Mariana Pfaelzer denied Countrywide’s motion to dismiss claims in a putative class action complaint arising out of Countrywide RMBS offerings that Countrywide violated Sections 11, 12, and 15 of the Securities Act of 1933. Countrywide argued that Plaintiffs purchased the MBS for three of the nine contested offerings before Countrywide issued its prospectus supplements, thus making it impossible for Plaintiffs to have relied on the alleged misstatements contained in those prospectus supplements. Judge Pfaelzer found that there were too many unknown facts regarding the circumstances of Plaintiffs’ purchases to dismiss these claims, including the possibility that Plaintiffs reviewed drafts of the prospectus supplements. Decision.