GSE Credit Risk Sharing Roundtable Discussion

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.

SEC No-Action Letter on Rule 15Ga-1 and Ginnie Mae

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.

Bank of America Settles MBS Case for $315 Million

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.

District Court Judge Narrows Morgan Stanley MBS Suit

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.

Federal Judge Denies Countrywide’s Motion to Dismiss On Three Offerings in MBS Litigation

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.

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.

National Credit Union Administration Sues Goldman Sachs Over Sale of MBS

On August 9, 2011, the National Credit Union Administration Board (“NCUA”) sued Goldman Sachs in federal court in Los Angeles over Goldman’s sale of mortgage-backed securities to credit unions. NCUA claims that Goldman misrepresented the quality of the loans backing the securities in its offering documents. It also claims that the loans did not satisfy the underwriting guidelines Goldman included in its offering documents. The Complaint cites the Financial Crisis Inquiry Commission Report issued in January 2011 in support of its claims that mortgage loan originators disregarded prudent underwriting practices and securitizers like Goldman did not perform sufficient due diligence, leaving investors without access to critical information about the loans. NCUA alleges claims under Sections 11 and 12(a)(2) of the ’33 Act, Sections 25401 and 25501 of the California Corporate Securities Law of 1968, and Section 17-12a509 of the Kansas Uniform Securities Act. NCUA seeks more than $491 million in damages. NCUA has brought four actions against other RMBS issuers since June 20, 2011. Complaint.

Judge Dismisses Two Class Action Suits Against Schwab as Improperly Based on State Law

On March 2, 2011, Judge Lucy Koh of the U.S. District Court for the Northern District of California dismissed all claims made by lead plaintiff Northstar Financial Advisors against Schwab Investments, its Trustees and its Investment Advisor. Northstar brought a class action lawsuit alleging that the defendants deviated from their investment strategy by investing in non-U.S. agency collateralized mortgage obligations and by concentrating greater than 25% of its investments in U.S. agency and non-agency MBS. Judge Koh found that Northstar’s claims should have been brought under federal, rather than state, law. Federal law applies under the Securities Litigation Uniform Standards Act (“SLUSA”) because Northstar represents a putative class of over 50 people and alleges misrepresentations made in connection with the purchase or sale of shares of Schwab’s fund. Judge Koh specifically noted that the complaint need not allege scienter, reliance, or loss causation in order for SLUSA preclusion to apply, and even where the state law claims do not require a misrepresentation, if the allegations themselves assert misrepresentations as the basis for those claims, federal law should apply.

Judge Koh also made a similar ruling on March 8, 2011 in a factually related case, brought by a class against Schwab Investments for the same investments and alleged misstatements. Northstar Decision. Smit Decision.

Judge Certifies Class in Lawsuit Against Dynex Capital for Over $630 Million in Mortgage-Backed Securities

On March 7, 2011, Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York certified a class of plaintiffs bringing claims under Section 10(b) and 20(a) of the Exchange Act against Dynex Capital, Inc. on the basis that Dynex Capital allegedly made material misstatements and omissions regarding underwriting standards, market conditions, loss reserves, and delinquencies in connection with the sale of bonds that are MBS collateralized by pools of mobile home loans. Judge Baer certified the class to include all purchasers of two MBS, even though the lead plaintiff purchased from only one tranche of one MBS. Unlike several other federal district judges, Judge Baer certified the class for purchasers of both MBS even though individual plaintiffs who purchased other tranches have different repayment rights and damages. Judge Baer also rejected Dynex Capital’s argument that the element of reliance was not sufficiently pled on the basis that the fraud-on-the-market doctrine does not apply because the market for the bonds at issue was inefficient. In finding that an efficient market existed, the court noted that trading volume of these MBS securities was sufficient , market makers for these securities existed, and there was sufficient price reaction to the disclosure of material information concerning these securities. Decision.

Massachusetts Supreme Court Rules Against MBS Trustees in Quiet Title Actions

On January 7, 2011, the Massachusetts Supreme Judicial Court ruled against two trustees of MBS securitizations in actions to quiet title to foreclosed properties. The court found the two residential foreclosures at issue invalid because the trustees could not prove assignment of the mortgages to them prior to the foreclosure sales. Though the court held that valid assignment could be accomplished and proved through securitization agreements, it held that these particular plaintiffs had failed to produce sufficient documentation with enough detail to establish the full chain of assignment for these particular mortgages prior to the foreclosure sales. In a concurring opinion, two Justices criticized the “utter carelessness with which the plaintiff banks documented the titles to their assets.” Decision.