If you thought we were finally done with indemnification litigation focused on residential mortgages originated before the financial crisis of 2007-2008, think again. Over the past year, the Federal Deposit Insurance Corporation (FDIC) as receiver for Washington Mutual Bank has filed six lawsuits against individual mortgage companies and mortgage brokers in the U.S. Court for the Central District of California. The suits are about loans those companies brokered to Washington Mutual Bank and/or its subsidiaries, including Long Beach Mortgage Company (collectively, WaMu). The FDIC-R (FDIC as Receiver) claims that the brokered loans contained “inaccurate or incomplete loan applications or other documentation,” resulting in losses to the FDIC-R. The FDIC-R has threatened many more lawsuits, against entities to which it sent demand letters months or years ago.
These loans were part of a larger group of loans underwritten, approved and funded by WaMu, which it ultimately sold into residential mortgage-backed securitized trusts for which Deutsche Bank National Trust Company served as trustee (Trustee). On September 25, 2008, the Office for Thrift Supervision shut down WaMu and appointed the FDIC as receiver. Three months later, the Trustee filed a proof of claim against the FDIC as receiver, alleging a multitude of breaches of representations and warranties as well as servicing violations by WaMu. Because the FDIC failed to respond to the proof of claim, the Trustee filed a lawsuit seeking indemnification from WaMu, and JPMorgan Chase (JPMC), which purchased certain of WaMu’s assets and liabilities.
The parties ultimately entered into a settlement agreement on August 19, 2016, which was subsequently approved by a California Superior Court. On September 8, 2017, the FDIC-R issued a $3,006,929,660 Receivership Certificate in settlement of Trustee’s claims.
The loans sued upon to date are a miniscule fraction of the 556,000 loans as to which the FDIC, the Trustee, and JPMC settled claims in 2016. The FDIC-R threatens to file new lawsuits against additional brokers that performed no underwriting of any of these loans, as well as some mortgage originators.
The six pending cases are all still in the very early stages. They’re assigned to different Judges on the federal Central District of California bench. No major motions, such as motions to dismiss or motions for summary judgment, have yet been filed by any of the defendants. We expect that the FDIC-R will file additional suits within the next four months, because its position is that the statute of limitations on these claims will not expire until on or about September 8, 2023. Having represented several mortgage companies, brokers and regional banks in cases of this type for well over a decade, we believe that most of them generally have strong legal and factual defenses available to them to combat such claims. Being aware of the potential grounds for such defenses is imperative in dealing with these suits, which often seek many millions of dollars in alleged damages, interest and fees.