RMBS

First Department Grants Summary Judgment Against RMBS Collateral Manager for Failure to Raise Issue of Fact Regarding Loss Causation

 

On March 2, 2017, the New York Supreme Court, Appellate Division, First Department reversed a decision from the New York Supreme Court and dismissed a complaint filed by two hedge funds against the collateral manager of a $400 million collateralized debt obligation (“CDO“) investment. Plaintiff hedge funds Basis PAC-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis“) filed a lawsuit asserting fraud claims against defendant TCW Asset Management Company (“TCW“), which had served as the collateral manager for the Dutch Hill II CDO. Dutch Hill II was created to serve as an investment vehicle for the purpose of taking a net long position on extremely risky RMBS; TCW selected the assets for the Dutch Hill II portfolio and made representations to Basis about the viability of the subprime RMBS market. Basis purchased over $27 million of Dutch Hill II notes in 2007, but the notes were all but valueless following the housing crisis. In moving for summary judgment, TCW submitted expert evidence showing that the housing market crash would have caused Basis’s losses even if the collateral underlying the CDO had not been misrepresented, as Basis alleged. In response, Basis did not submit sufficient evidence rebutting that opinion or showing that any of the particular misrepresentations by TCW caused its losses. The Supreme Court had denied summary judgment, holding that there were issues of fact as to loss causation. The First Department reversed, concluding that by failing to rebut TCW’s evidence, Basis had not raised an issue of fact as to loss causation.  Opinion.

Rating Agency Developments

 

On January 31, 2017, Moody’s updated its U.S. RMBS surveillance methodology. Report.

On January 31, 2017, Moody’s updated its rating methodology for rated issuers in the telecommunications service provider industry globally. Report.

On January 27, 2017, Moody’s revised its approach to assessing credit risk for companies in the soft beverage industry globally. Report.

On January 27, 2017, S&P released an advance notice of proposed criteria changes for rating U.S. residential mortgage-backed securities (RMBS). Report.

Moody’s to Pay $864 Million to U.S. Department of Justice & 21 States in Credit Rating Settlement

 

On January 13, 2017, Moody’s Corporation agreed to pay $864 million in a settlement with the U.S. Department of Justice and 21 states in connection with the ratings agency’s credit rating work on residential mortgage‑backed securities and other products during the years leading up to the financial crisis. The settlement is comprised of a $437.5 million payment to the Department of Justice and $426.3 million to 21 states. The Statement of Facts accompanying the Settlement Agreement states that from 2004‑2010, Moody’s issued credit ratings of RMBS and CDOs, but that there were potential conflicts of interest in Moody’s “issuer‑fee‑based” business model, in which issuers paid Moody’s for their credit opinions. The settlement agreement does not constitute sanctions “for any act or practice of Moody’s.” In accordance with the settlement agreement, Moody’s agrees to maintain and adopt certain compliance measures that “promote the integrity and independence of Moody’s credit ratings” for a period of five years. Settlement Agreement. Statement of Facts. Moody’s Compliance Commitments.

Deutsche Bank Settles DOJ RMBS Claims for $7.2 Billion

 

On December 23, 2016, Deutsche Bank AG (“Deutsche Bank“) announced that it had reached a settlement in principle with the United States Department of Justice (“DOJ“) to resolve possible civil claims arising from Deutsche Bank’s issuance and underwriting of RMBS in the years leading up to the financial crisis. The $7.2 billion settlement includes a $3.1 billion civil penalty, with an additional $4.1 billion paid in the form of consumer relief (including loan modifications and other types of borrower assistance).

Rating Agency Developments

 

On December 7, 2016, Moody’s published its ratings methodology for sustainable net cash flow and value for CMBS and CRE CDO CLO real estate collateral in the Americas and ex-Japan Asia Pacific. Report.

On December 6, 2016, DBRS published its methodology for rating European covered bonds. Report. Addendum.

On December 1, 2016, DBRS updated its master ratings methodology for U.S. asset-backed securitizations (“ABS“). Report.

On December 1, 2016, DBRS updated its ratings methodology for U.S. structured finance transactions. Report.

On December 1, 2016, DBRS updated its methodology for evaluating U.S. ABS originators. Report.

On December 1, 2016, DBRS updated its methodology for evaluating U.S. ABS servicers. Report.

On December 1, 2016, Fitch updated its U.S. RMBS master rating criteria. Report.

On December 1, 2016, Fitch updated and merged its ratings criteria for analyzing U.S. RMBS backed by seasoned performing, re‑performing and non‑performing loans purchased in the secondary market and issued starting in 2014. Report.

On December 1, 2016, Fitch updated its global consumer ABS rating criteria for analyzing ABS backed by consumer receivables globally. Report.

On December 1, 2016, Fitch updated its ratings criteria for analyzing large loans in CMBS. Report.

Rating Agency Developments

 

On November 30, 2016, Fitch published its U.S. water and sewer revenue bond rating criteria. Report.

On November 29, 2016, Fitch published its rating criteria for RMBS transactions in Europe, Middle East and Africa (EMEA). Report.

On November 29, 2016, Fitch published its rating criteria for GARVEE bonds. Report.

On November 28, 2016, DBRS published an update to its approach to rating U.S. RMBS transactions. Report.

On November 28, 2016, Moody’s published its approach to rating Europe, Middle East and Africa (EMEA) CMBS transactions. Report.

RBS Settles RMBS Suit for $1.1 Billion

On September 27, 2016, the Royal Bank of Scotland (“RBS”) announced a $1.1 billion settlement with the National Credit Union Administration (“NCUA”) in connection with two federal securities litigations concerning RBS’s underwriting and sale of RMBS. The NCUA, as liquidating agent for Western Corporate Federal Credit Union and U.S. Central Federal Credit Union, brought these actions against RBS and other defendants, claiming that the defendants had misled the credit unions about the risks of RMBS and made various misrepresentations in the offering documents.  Further details of the settlement are not publicly available.

U.S. Bank and WMC Settle Four RMBS Lawsuits

On September 22, 2016, RMBS Trustee U.S. Bank National Association (“U.S. Bank”) and loan originator WMC Mortgage LLC (“WMC”) filed a stipulation of dismissal in four RMBS lawsuits in light of a settlement reached between the parties. The details of the settlement are not publicly available.  The settlement resolves three lawsuits initiated by U.S. Bank, alleging that WMC misrepresented the quality of loans it sold in 2006 and 2007 RMBS offerings, as well as a lawsuit brought by WMC against U.S. Bank, seeking a declaratory judgment regarding WMC’s performance under the governing agreements of an RMBS deal.  Two of U.S. Bank’s lawsuits include claims against loan originator Equifirst Corporation, but these claims are not part of the settlement. Stipulation of Dismissal.

Lehman Estate Settles Claims By RMBS Insurer and Trustee

 

On September 20, 2016, Judge Shelley Chapman of the U.S. Bankruptcy Court for the Southern District of New York approved the $37 million settlement of $1.3 billion in claims asserted against the estates of two defunct Lehman Brothers’ entities by Syncora Guarantee Inc. in its capacity as the insurer for certain certificates issued from the GMFT 2006-1 RMBS trust. After being sued by the GMFT 2006-1 Trustee for payment under the insurance policy, Syncora filed its own claim for indemnification against Lehman as sponsor of the securitization. In addition to settling Syncora’s claim, the agreement also releases Lehman from all potential claims brought by the GMFT 2006-1 Trustee, U.S. Bank NA, in exchange for Lehman’s cooperation in a separate lawsuit arising from GreenPoint Mortgage Funding Inc.’s alleged failure to repurchase defective loans. Settlement Order. Settlement Agreement Submitted For Approval.

Court Denies Summary Judgment on Issues of Timeliness in NCUA RMBS Suit

 

On September 1, 2016, Judge John W. Lungstrum of the U.S. District of Kansas denied cross-motions for summary judgment on the issue of timeliness brought by RBS, Nomura and the NCUA in NCUA v. RBS Securities, et al. NCUA alleges in its 2011 complaint that it suffered losses of $800 million on 2006-2007 vintage RMBS certificates based on misstatements by the defendants. Defendants RBS and Nomura argued on summary judgment that NCUA’s claims must be dismissed because they were not brought within one year after discovering the allegedly untrue statement or omission, or after such discovery should have been reasonably made. NCUA argued in opposition that it did not have constructive notice of the facts underlying its claims by the relevant dates and that its claims were timely. The Court found that “a jury could reasonably find in favor” of either party as to what a “reasonably diligent investor would have known and done in 2007 and 2008 on the timeliness issue” and that as a result fact questions remained precluding summary judgment for either side. Memorandum and Court Order.