On September 4, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California entered an order dismissing with prejudice the Federal Housing Finance Agency’s claims against UBS Securities Inc. pursuant to a settlement agreement between the parties. The dismissal bars the remaining non-settling defendants (which include Bank of America, Citigroup and Deutsche Bank Securities, among others) from bringing claims for indemnity or contribution against UBS, and likewise bars UBS from bringing claims for indemnity or contribution against the remaining non-settling defendants. FHFA originally filed the action in the Supreme Court for the State of New York in 2011, alleging misstatements and omissions about loan quality in connection with RMBS purchased by Fannie Mae and Freddie Mac. The case was subsequently removed to federal court and consolidated into the FHFA multidistrict litigation before Judge Pfaelzer. Order.
Federal Housing Finance Agency
FHFA Files $165 Million Suit Against HSBC and Decision One
On March 8, the Federal Housing Finance Agency (FHFA), acting as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) commenced litigation in the Supreme Court of the State of New York against Decision One Mortgage Company, LLC (Decision One), and HSBC Finance Corporation (HSBC) (as an alleged successor in interest). FHFA’s Summons with Notice alleges claims for breach of contract, damages, specific performance, indemnity, and reimbursement arising out of the banks’ alleged failure to repurchase loans. FHFA alleges that Decision One breached contractual warranties as to the quality of the mortgage loans, including that the loans complied with relevant statutes, complied with underwriting guidelines, and were not predatory. FHFA seeks specific performance of alleged repurchase obligations or equitable damages totaling nearly $165,000,000. Summons with Notice.
Court Denies Challenge to FHFA Loan Sampling Methodology
On December 3, Judge Denise Cote of the Southern District of New York denied a joint motion by all defendants across fifteen related RMBS actions brought against major financial institutions by the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac (“GSEs”). The claims in the case arise out of certificates purchased by the GSEs from 449 different securitizations backed by roughly 1.1 million mortgage loans. The FHFA plans to reunderwrite a sample of those loans and seeks to extrapolate the results of that sample to the entire loan pools; the defendants’ motion sought an order excluding the results of the sampling from evidence at the trial of the actions, challenging the methodology that the FHFA intends to use to select the sample. The Court rejected the defendants’ arguments, finding that at most they raised questions about the evidentiary weight that should be assigned to the samples, rather than the question whether they should be admitted into evidence. Order.
FHFA Can Pursue Claims Against Non-Debtor Affiliates of Residential Capital
On July 17, Judge Denise Cote of the United States District Court for the Southern District of New York ruled that the Federal Housing Finance Agency (“FHFA”) can pursue certain RMBS-related claims against affiliates of Residential Capital LLC (“ResCap”). ResCap, which has filed for Chapter 11 bankruptcy, brought a motion before Judge Cote to enjoin the FHFA from pursuing claims against ResCap’s non-debtor affiliates or, in the alternative, to extend the automatic stay protection afforded by its Chapter 11 status. Judge Cote denied ResCap’s motion. The underlying FHFA complaint alleges that defendants (including Ally Financial, Ally Securities, and GMAC Mortgage) made false or misleading statements or omissions in the offering materials for $6 billion worth of RMBS. Decision.
SDNY Denies UBS’s Motion to Dismiss FHFA’s Claims as Untimely
On June 26, 2012, Judge Denise L. Cote of the Southern District of New York denied UBS’s motion to dismiss the Federal Housing Finance Agency’s RMBS action against it as untimely. The FHFA’s suit arises out of Fannie Mae’s and Freddie Mac’s investments in $6.4 billion in UBS residential mortgage backed securities. Judge Cote held that the repose periods for the claims did not begin to run until the securities were actually marketed for sale. Order.
Deutsche Bank Affiliate Sued for Breach of MBS Warranties
On May 29, 2012, the Federal Housing Finance Agency (“FHFA”), acting as conservator for Freddie Mac, filed a summons with notice in New York state court against DB Structured Products. The FHFA purports to sue derivatively on behalf of the Trustee of a particular RMBS trust that issued certificates purchased by Freddie Mac. The FHFA alleges that DBSP breached its contractual representations and warranties concerning the underlying mortgage loan originators’ compliance with underwriting guidelines, the absence of errors or fraud in the origination process, the loans’ compliance with federal, state, and local laws, the accuracy of loan-level data provided to rating agencies, and other loan-related characteristics. The FHFA seeks specific performance of DBSP’s repurchase obligations under the relevant contracts. Summons.
Manhattan Federal Judge Denies UBS’s Motion to Dismiss FHFA Suit
On May 4, the Honorable Denise Cote of the Southern District of New York denied UBS Americas Inc.’s (“UBS”) motion to dismiss the Federal Housing Finance Agency’s (“FHFA”) complaint against it for violations of the Securities Act. FHFA alleges that UBS fraudulently induced Fannie Mae and Freddie Mac into purchasing $6.4 billion worth of mortgage-backed securities from 22 different securitizations by misrepresenting the quality of the mortgage loans and that the mortgage loans complied with the applicable underwriting guidelines. Judge Cote held that the complaint was timely and not barred by the Securities Act’s Statute of Repose, as well as that FHFA had standing to bring the action. The Court also held that the complaint stated a claim under the Securities Act because FHFA had alleged actionable misrepresentations in the offering documents concerning LTV ratios, owner-occupancy status and compliance with underwriting guidelines. Judge Cote did, however, dismiss FHFA’s claims for negligent misrepresentation, concluding that because both parties were sophisticated, no special relationship existed that would support such a claim. Decision.
House Committee Investigates Cost of Federal Housing Finance Agency RMBS Lawsuits
The House Committee on Oversight and Government Reform, as part of its ongoing monitoring of the Federal Housing Finance Agency (“FHFA”), is investigating the cost to the government of numerous lawsuits against financial institutions brought on behalf of Fannie Mae and Freddie Mac by Quinn Emanuel and Kasowitz Benson. In a September 29, 2011 letter to the Acting Director of the FHFA, Rep. Darrell Issa (R-Cal.), Chairman of the committee, requested detailed information about the FHFA’s decision-making process in selecting counsel, the terms of the representation agreements with each firm, the expected value of the lawsuits, and the expected cost of the representations. Rep. Issa requested an explanation of the FHFA’s decision to use private law firms instead of government lawyers and also requested copies of all RMBS-related communications between the FHFA and the Department of Justice or other government agencies. Rep. Issa asked the FHFA to respond by October 13. Letter.
FHFA Sues 17 Banks For More Than $200 Billion In MBS Losses
On September 2, 2011, the Federal Housing Finance Agency (“FHFA”) – the federal agency overseeing Fannie Mae and Freddie Mac – filed suit against 17 major banking institutions in New York and Connecticut courts. The suits claim that the banks misrepresented the quality of the mortgage loans backing securitizations purchased by Fannie Mae and Freddie Mac, and bring claims under Sections 11, 12, and 15 of the Securities Act of 1933. Complaints.
FHFA Sues UBS For Misrepresenting RMBS Risk
On July 27, 2011, Fannie Mae and Freddie Mac’s regulator, the Federal Housing Finance Agency, sued UBS and several of its executives in New York federal court under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The complaint alleges that between September 2005 and August 2007, Fannie Mae and Freddie Mac purchased over $4.5 billion in RMBS from UBS in connection with 16 different securitizations. Plaintiff claims that the RMBS registration statements, which contained loan and origination information, contained materially false statements regarding the quality of the mortgages in the securitizations, and the complaint focuses specifically on alleged borrower fraud and faulty underwriting practices. Complaint.