RMBS Litigation Relating to Loans Sold Prior to 2008: Are We Finally Nearing The End?
The years since the 2007–2008 financial crisis have been marked with milestone settlements of claims against the major mortgage “aggregators” (sometimes also known as “investors” in the mortgage purchasing context), who then became “securitizers” or “sponsors” with respect to the loans that they purchased. In the years immediately following the crisis, aggregators often first faced suits (or, at the very least, threats of high-stakes suits) from government agencies and departments—such as the United States Department of Justice—and by the major GSEs (Government-Sponsored Enterprises), Fannie Mae and Freddie Mac. Even as the aggregators were attempting to resolve those suits and threatened actions, they began getting hit with claims by trustees that managed the residential mortgage-backed securitization trusts established by the aggregators/sponsors and by the monoline insurers that “wrapped” some of the trusts. These claims by the trustees and monoline insurers comprise RMBS (Residential Mortgage-Backed Securities) litigation.
RMBS plaintiffs notched a number of significant, substantial recoveries against the major aggregators. Countrywide (after having been acquired by Bank of America) was among the first to yield, reaching a seminal settlement in 2011 concerning the RMBS trusts that it had sponsored. ResCap announced in 2013 that it had reached a settlement agreement allowing recovery on $8.7 billion in claims. JPMorgan Chase and its affiliates, including Bear Stearns, reached an agreement in principle to settle their RMBS exposure for approximately $4.5 billion in 2013. Citibank resolved similar claims in 2014. Lehman Brothers Holdings Inc. (LBHI) reached a final settlement of the RMBS-related claims against it in early 2018.
These settlements have hardly been the end of the story with respect to the underlying loans that the sponsors securitized, however. Many of these settlements generated an enormous amount of follow-up litigation. In such instances, aggregators transform themselves from defendants into plaintiffs, suddenly professing the opposite of what they asserted when they were defending themselves against incoming claims. What the aggregators/sponsors formerly hailed as, for the most part, large volumes of sound loans very much worthy of an institutional investor’s investment dollars suddenly become derided as “breaching loans” supposedly rife with material defects. As they transition to a plaintiff mindset, these aggregators target mortgage originators and brokers, seeking the remedy of contractual “indemnification” to compensate the aggregators for their settlement payments. ResCap sued dozens of originators and brokers in this manner. LBHI has sued (and is still litigating against) an even larger number of lenders, and Chase (or its affiliate EMC Mortgage) has regularly threatened to bring these types of suits against lenders as well.
It is unclear whether there will be additional RMBS-related “indemnification” or breach of contract claims against originators and brokers (relating to pre-2008 loan sales) once the ongoing LBHI and Chase/EMC suits have ended. There are additional candidates out there that might also make the defendant-to-plaintiff transition. In 2019, Deutsche Bank (in its capacity as an RMBS trustee, however, rather than as an aggregator) settled multiple suits filed against it by investors, including Royal Park and BlackRock. Other claims against Deutsche Bank remain ongoing, including a suit brought by the National Credit Union Administration.
In addition to Deutsche Bank, U.S. Bank, Wells Fargo, and Bank of New York Mellon are other prominent defendants that have settled claims brought by investors like Royal Park. Earlier this week, BNY Mellon and Royal Park sought to settle long-running claims brought by Royal Park (though the District Court Judge in Manhattan federal court, Gregory Woods, has asked the parties to provide further justification for the proposed resolution before he will approve it and dismiss the claims). These suits, too, involve claims against the banks in a trustee capacity, rather than as aggregators/sponsors.
Moreover, the scope and value of these settlements appear much more limited than the earlier, massive settlements by Countrywide and others noted above. Still, it is possible that Deutsche Bank, U.S. Bank, BNY Mellon, and Wells Fargo could seek to pass their liability “upstream” to the aggregators, or even move directly against the originators or brokers.
On another front, Wells Fargo continues litigating against the FHFA regarding loans sold by Wells to Freddie Mac. The alleged magnitude of the claims in this suit, which seeks recovery of over $1 billion in alleged damages, makes this case one to watch closely.
Given some courts’ narrow interpretations of statutes of limitations, as well as the possibility of more suits by the FHFA (which might fare more favorably under time-bar analyses than trustees or monolines), the end of this era of litigation might still be years away.