Securitization

Lehman Estate Settles Claims By RMBS Insurer and Trustee

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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.

New York Appellate Court Reverse Lower Court, Allows RMBS Action to Proceed Against Morgan Stanley

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On August 11, 2016, the First Department of the Appellate Division of the Supreme Court of the State of New York reversed the lower court, allowing RMBS Trustee U.S. Bank to proceed with claims against Morgan Stanley in connection with alleged losses of $140 million resulting from the sale of allegedly defective loans. Following its own ruling from last year (covered here), the First Department again concluded that the alleged failure to notify securitization counterparties of breaches of representations and warranties constitutes a viable cause of action independent from claims arising from the alleged breaches themselves. The First Department also reversed dismissal of the plaintiff’s gross negligence claims noting that – notwithstanding language in the governing contract’s sole remedy provision – the law does not permit a party to insulate itself from paying for damages arising from its grossly negligent conduct. Order.

Summary Judgment Denied in Monoline Insurer Lawsuit Against J.P. Morgan

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On June 6, 2016, Justice Alan D. Scheinkman of the New York Supreme Court for Westchester County denied J.P. Morgan’s motion for summary judgment on MBIA’s fraudulent concealment claim. The court had previously granted summary judgment in favor of J.P. Morgan on MBIA’s fraud claim, but permitted MBIA to amend its complaint to add a fraudulent concealment claim that J.P. Morgan failed to disclose complete and accurate third-party due diligence results regarding the collateral underlying the securitization. First, Scheinkman rejected J.P. Morgan’s argument that it did not owe MBIA an affirmative duty to disclose the results of the due diligence review. The Court held that the bid letter between J.P. Morgan and MBIA evinced a contractual relationship between the parties, and that even in the absence of such a relationship, J.P. Morgan was acting as an agent for the deal’s sponsor, who was obligated to share the due diligence results with MBIA.  Second, Scheinkman held that issues of fact precluded summary judgment on actual reliance, because withholding, disguising the significance, and delivering an altered version of due diligence results may have thwarted MBIA’s ability to protect itself.  Last, the Court held that whether MBIA justifiably relied on J.P. Morgan’s failure to disclose the due diligence results is a question for the jury.  Decision & Order.

Treasury Request for Public Input on Expanding Access to Credit through Online Marketplace Lending

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“Online marketplace lending refers to the segment of the financial services industry that uses investment capital and data-driven online platforms to lend to small businesses and consumers.”[1]

On July 20, the Department of the Treasury published a Notice and Request for Information (“RFI”) seeking comment on various aspects of online marketplace lending, including –

  • the business models and products offered to small businesses and consumers
  • the potential to expand access to credit to underserved market segments
  • how the financial regulatory framework should evolve to support the growth of the industry
  • Treasury asks for comment on 14 categories of questions, some of which include multiple specific questions, which we summarize and, with respect to some, offer initial thoughts on below.

To view the full article, please click here.

[1] 80 Fed. Reg. 42866 (July 20, 2015)

Greenpoint’s Motion to Dismiss Loan Misrepresentation Suit Granted in Part

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On October 15, Judge Donovan Frank of the U.S. District Court for the District of Minnesota, granted in part and denied in part Greenpoint Mortgage Funding’s motion to dismiss a lawsuit filed by Residential Funding Co., an affiliate of Residential Capital.  Residential Funding alleged that Greenpoint breached representations and warranties in connection with $88 million in mortgage loans it sold to Residential Funding and that Residential Funding securitized.  Following a bankruptcy court’s 2013 approval of a global settlement of Residential Funding’s RMBS-related liabilities, Residential Funding sued Greenpoint seeking indemnification and damages for breach of contract.  Judge Frank dismissed the breach of contract claim as time barred under Minnesota’s six-year statute of limitations because the alleged breaches at issue occurred when the loans were acquired, which was more than six years before Residential Funding filed suit.  Judge Frank did not dismiss the indemnification claim, which Greenpoint argued was not properly assigned to Residential Funding, because whether Residential Funding was the proper plaintiff was a factual question that could not be resolved on the pleadings.  Order.

Rating Agency Developments

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On August 23, Moody’s identified key risk factors in securitizations of single-family rental properties, including: (i) the performance of a manager of the properties; (ii) the variability of cash flows from the rental and ultimate sale of the properties; and (iii) the lack of historical data on the single-family rental market.  Moody’s Release.  

On August 23, Moody’s released its reinvestment rate assumptions for U.S. state revolving fund and pool programs.  Moody’s Report. 

On August 23, Moody’s released its interest rate assumptions for state HFA cash flows.  Moody’s Report. 

On August 22, DBRS issued a request for comment on its U.S. collateralized fund obligations backed by private equity rating criteria. DBRS Request for Comment. 

On August 21, Moody’s published a request for comment on proposed adjustments to its modeling assumptions to account for the impact of a rapid and significant country credit deterioration on structured finance transactions.  Comments may be submitted until October 30. Moody’s Release.  Moody’s Report.

Note: Free registration is required for rating agency releases and reports.

S.D.N.Y. Holds Monoline Insurer Can Pursue Pool-Wide Remedy Based on Sampling of Loans

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On March 25, 2011, Judge Paul A. Crotty of the Southern District of New York granted partial summary judgment to Syncora Guarantee, Inc., a monoline insurer, in a suit against Bear Stearns affiliate EMC Mortgage Corp. In that decision, Judge Crotty rejected EMC’s argument that the exclusive remedy available to Syncora for breaches of representations and warranties on Home Equity Line of Credit (“HELOC”) residential mortgage loans underlying the insured securitization was the repurchase of the individually identified, non-complying loans. Instead, the court, citing the broad rights and remedies for which Syncora bargained, accepted Syncora’s position that it “could seek a pool-wide remedy based on sampling and extrapolation.” Syncora Decision.