On December 6, 2013, PNC Financial Services Group, Inc. announced that its affiliate, PNC Bank, National Association, had reached an agreement in principle with the Federal Home Loan Mortgage Corporation (Freddie Mac) to resolve substantially all indemnification and repurchase obligations related to loans sold to Freddie Mac between 2000 and 2008. Under the terms of the agreement, PNC Bank will pay Freddie Mac a total of $89 million (less credits of $8 million) to resolve certain existing and future repurchase obligations related to approximately 900,000 loans originated and sold to Freddie Mac primarily between 2000 and 2008, and to compensate Freddie Mac for certain past losses and potential future losses relating to denials, rescissions and cancellations of mortgage insurance. The agreement follows a previously announced agreement in principle that PNC reached with the Federal National Mortgage Association (Fannie Mae) to resolve repurchase demands with respect to loans sold between 2000 and 2008. Read PNC’s press release here.
On December 2, 2013, Freddie Mac and Bank of America announced that they had entered into a settlement agreement concerning Freddie Mac’s claims related to representations and warranties on single-family loans sold to Freddie Mac. Under the terms of the agreement, Bank of America will pay Freddie Mac a total of $404 million, and Freddie Mac will release Bank of America from certain existing and future repurchase obligations for approximately 716,000 loans originated primarily between 2000 and 2009, and subsequently purchased by Freddie Mac. The payment to Freddie Mac also compensates Freddie Mac for certain past losses and potential future losses relating to denials, rescissions and cancellations of mortgage insurance. Read Freddie Mac’s announcement here. Read Bank of America’s announcement here.
On November 26, 2013, a New York state court allowed HSH Nordbank to proceed with most of its claims against Goldman Sachs in connection with $110 million in residential mortgage-backed securities (RMBS) that Goldman Sachs securitized and HSH Nordbank purchased. HSH Nordbank filed its action in August 2012, alleging that Goldman Sachs knew that the loan originators for the loans underlying the RMBS had systematically abandoned the underwriting guidelines described in the securities’ offering materials. Goldman Sachs moved to dismiss the claims as time-barred under German law and further argued that HSH Nordbank had not adequately pleaded justifiable reliance, scienter, loss causation, or any actionable material misrepresentation. In allowing HSH Nordbank to proceed with most of its claims, Justice Melvin L. Schweitzer found that the claims were not time-barred by Germany’s statute of limitations and that HSH Nordbank’s fraud claims related to appraisal values, loan-to-value ratios, and owner-occupancy rates were sufficiently pleaded to survive a motion to dismiss. The court did, however, dismiss HSH Nordbank’s negligent misrepresentation claims and allegations that Goldman Sachs had manipulated credit agencies’ ratings of the securities. The case is HSH Nordbank AG, et al. v. The Goldman Sachs Group Inc., et al., case number 652991/2012, in the Supreme Court of the State of New York, County of New Yorkk. Read the court’s decision here.
On November 25, 2013, a New York state court allowed HSBC Bank USA, as trustee for Ace Securities Corp., Home Equity Loan Trust, Series 2007-HE1, to proceed with a putback lawsuit against Deutsche Bank Structured Products (DBSP) in connection with a $951 million residential mortgage securitization. HSBC alleged that DBSP, as originator of the loans underlying the securities at issue, misrepresented the risk characteristics of the loans. Justice Shirley Werner Kornreich allowed HSBC to proceed with a breach of contract cause of action, but limited its damages to those connected to non-conforming loans. The case is HSBC Bank USA NA, et al. v. DB Structured Products Inc., case No. 650327/2013, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On November 22, 2013, a New York state court allowed Bank of New York Mellon, in its capacity as trustee for a pool of loans known as J.P. Morgan Acquisition Trust, Series 2006-WMC4, to proceed with a lawsuit against WMC Mortgage and JPMorgan in connection with a $1.9 billion residential mortgage securitization. Bank of New York Mellon filed the lawsuit in December 2012, alleging that the defendants failed to repurchase residential mortgages that did not meet underwriting standards. Justice Shirley Werner Kornreich denied most of defendants’ motion to dismiss, but limited plaintiff’s damages to non-conforming loans. The court further concluded that the governing indemnification provisions allowed Bank of New York Mellon to seek the recoupment of its legal fees. The case is The Bank of New York Mellon, et al. v. WMC Mortgage LLC, et al., case number 654464/2012, in the Supreme Court of the State of New York, County of New York. Read the court’s decision here.
On November 19, 2013, a court in Illinois allowed Deutsche Bank National Trust Company (Deutsche Bank), as trustee for Morgan Stanley ABS Capital I Inc. Trust 2007-HE6, to proceed with a breach of representations and warranties claim against Decision One in connection with the securitization of 2,789 mortgage loans – with a value exceeding $500 million – that Decision One originated. Deutsche Bank filed its complaint on March 31, 2013, against Decision One and HSBC Finance, which acquired Decision One. The trustee alleged three breach of contract claims and one indemnification claim, and sought compensatory and rescissory damages along with the specific performance of repurchase of the loans. In allowing the trustee’s breach of representations and warranties claim to proceed against Decision One, the court found that a reference to a depositor direction in the Pooling and Servicing Agreement (PSA) did not bar the trustee from “undertaking legal remedies on its own accord.” The court also did not dismiss Deutsche Bank’s compensatory and rescissory damages claims, finding that how the Trustee’s remedy was characterized had little practical significance “given that the form of the relief…is the same in each case: the payment of money to make a Plaintiff whole.” The court dismissed with prejudice two of Deutsche Bank’s breach of contract claims as well as the indemnification claim. The court also dismissed HSBC Finance as a party. The case is captioned Deutsche Bank National Trust Co., as Trustee for Morgan Stanley ABS Capital I Inc. Trust 2007-HE6 v. Decision One Mortgage Co., LLC, et al., No. 2013 L 005823 in the Circuit Court of Cook County, Illinois. Read the court’s order here.
On November 19, 2013, the Justice Department, along with several federal and state government entities, announced a $13 billion settlement with JPMorgan – the largest settlement with a single entity in American history – to resolve federal and state civil claims arising out of the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS) by JPMorgan, Bear Stearns and Washington Mutual prior to Jan. 1, 2009.
The settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group and resolves only civil claims arising out of the RMBS packaged, marketed, sold and issued by JPMorgan, Bear Stearns and Washington Mutual. The agreement concludes and terminates all pending civil enforcement investigations, including those by the Department of Justice and the State AGs from California, Delaware, Illinois, Massachusetts and New York, relating to RMBS activities by JPMorgan Chase, Bear Stearns and Washington Mutual. The settlement also concludes and terminates all civil litigation claims brought by FDIC, FHFA and NCUA relating to securitizations of residential mortgage loans by JPMorgan Chase, Bear Stearns and Washington Mutual. The agreement does not release individuals from civil charges, nor does it release JPMorgan or any individuals from potential criminal prosecution. In addition, as part of the settlement, JPMorgan pledged to fully cooperate in investigations related to the conduct covered by the agreement.
As part of the settlement, JPMorgan acknowledged that it regularly represented to RMBS investors that the mortgage loans in various securities complied with underwriting guidelines. Contrary to those representations, on a number of different occasions, JPMorgan employees knew that the loans in question did not comply with those guidelines and were not otherwise appropriate for securitization, but they allowed the loans to be securitized – and those securities to be sold – without disclosing this information to investors.
Of the record-breaking $13 billion resolution, $9 billion will be paid to settle federal and state civil claims by various entities related to RMBS. Of that $9 billion, JPMorgan will pay $2 billion as a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion to settle federal and state securities claims by the National Credit Union Administration (NCUA), $515.4 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $4 billion to settle federal and state claims by the Federal Housing Finance Agency (FHFA), $298.9 million to settle claims by the State of California, $19.7 million to settle claims by the State of Delaware, $100 million to settle claims by the State of Illinois, $34.4 million to settle claims by the Commonwealth of Massachusetts, and $613.8 million to settle claims by the State of New York. JPMorgan will pay out the remaining $4 billion in the form of relief to aid consumers harmed by the unlawful conduct of JPMorgan, Bear Stearns and Washington Mutual. That relief will take various forms, including principal forgiveness, loan modification, targeted originations and efforts to reduce blight.
An independent monitor will be appointed to determine whether JPMorgan is satisfying its obligations. If JPMorgan fails to live up to its agreement by Dec. 31, 2017, it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.
On November 15, 2013, JPMorgan Chase & Co. announced that it had reached a $4.5 billion settlement agreement with 21 major institutional investors to make a binding offer to the trustees of 330 residential mortgage-backed securities (RMBS) trusts issued by J.P. Morgan, Chase, and Bear Stearns. The settlement offer, which the trustees may seek court approval for, would resolve all representation and warranty claims as well as servicing claims on all trusts issued by J.P. Morgan, Chase and Bear Stearns between 2005 and 2008. The agreement does not resolve claims on trusts issued by Washington Mutual. Read JPMorgan’s press release here.
On November 7, 2013, Belgium-based Royal Park Investments SA/NV (Royal Park) sued several UBS entities in New York state court over misrepresentations relating to $434 million in residential mortgage-backed securities (RMBS) that now-defunct Belgian bank Fortis Bank NA/SV purchased between 2005 and 2007. According to the complaint, UBS failed to disclose and materially misrepresented in its offering documents information regarding the nature and credit quality of the RMBS and their underlying loans. More specifically, according to Royal Park, the offering documents failed to disclose that, at the same time that UBS was offering the RMBS for sale, the bank was privately betting against the securities. The action is captioned Royal Park Investments SA/NV v. UBS AG, et al., case number 653901/2013, in the Supreme Court of the State of New York, County of New York. Read the complaint here.
On November 7, 2013, the Securities and Exchange Commission (SEC) charged RBS Securities Inc. (RBS), a subsidiary of the Royal Bank of Scotland plc, with misleading investors in a 2007 subprime residential mortgage-backed security (RMBS) offering. RBS agreed to settle the matter and pay approximately $153 million. In a complaint filed in federal court in Connecticut, the SEC alleged that RBS represented that the loans backing the offering met the lender’s underwriting guidelines even though nearly 30 percent fell so short of the guidelines that RBS should have excluded them from the offering entirely. According to the complaint, RBS, then known as Greenwich Capital Markets, quickly reviewed a very small portion of the loans and was paid approximately $4.4 million for its work as the lead underwriter on the transaction. The SEC’s complaint charges RBS with violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. RBS, without admitting or denying the SEC’s allegations, agreed to a final judgment that orders it to disgorge $80.3 million, plus prejudgment interest of $25.2 million, and pay a civil penalty of $48.2 million. Read the SEC’s complaint here and its press release here.