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RMBS and Buyback Litigation: As Some Aged Claims Get Resolved, Are More On The Way?

Philip R. Stein
The recent surge in residential mortgage buyback demands by Freddie Mac, among others, has a number of industry analysts bracing for a new wave of indemnification claims and put-back attempts against correspondent lenders and brokers by mortgage aggregators. Those potential actions pertain to loans of recent vintage, but remarkably enough, claims based on pre-2008 loans sold and securitized in residential mortgage-backed securities (RMBS) trusts are still being resolved. Credit Suisse Group disclosed in October that it reached an agreement to pay a New Jersey regulator $495 million to settle the largest claim remaining regarding its RMBS offerings before the 2008 financial crisis. In the same month, Bank of America Corp. agreed to make a considerably larger settlement payment to resolve RMBS-related claims against it by a bond insurer. 

The Credit Suisse loans were packaged into securities by the Swiss bank and sold to investors through two series of trusts — Home Equity Mortgage Trusts, referred to as HEMTs, and Home Equity Asset Trusts. The securities were backed by interest paid on residential mortgages. The New Jersey attorney general demanded more than $3 billion in damages, filing claims against Credit Suisse Securities (USA) LLC and two affiliates in December 2013 that asserted that the companies duped investors about the quality of loans packaged into the securities. Specifically, the state’s attorney general at that time accused the defendants in the lawsuit of peddling "toxic" securities between May 2006 and April 2007, while falsely claiming the underlying loans met acceptable underwriting standards.

The lawsuit further contended that Credit Suisse withheld material facts from investors, allegedly failing to disclose that the underlying mortgages backing the securities posed a high default risk. The mortgages ultimately caused enormous losses to investors, the New Jersey regulator alleged.  New Century Financial Corp., one of the largest subprime mortgage lenders in the U.S. before filing for bankruptcy in April 2007, while under criminal investigation, originated many of the loans in the HEMTs. 

The Credit Suisse settlement comes on the heels of another recent resolution of somewhat similar claims.  Bank of America Corp. told investors earlier in October, that it had agreed to pay $1.84 billion to Ambac Assurance Corp. to settle the bond insurer's remaining litigation with the bank over pre-2008 mortgage securitizations.  It remains to be seen whether Credit Suisse and Bank of America, notwithstanding statute of limitations concerns and other potential litigation hurdles, will attempt to offload some portion of their losses onto residential mortgage loan originators and brokers.  

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