A U.S. District Court judge said that Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings Inc. (NMR) misled Freddie Mac and Fannie Mae when it sold them faulty mortgage-backed securities in 2008. The two banks are the only financial firms who opted to go to trial rather than settle the claims against them. Over a dozen other firms, including Bank of America (BAC) and Goldman Sachs (GS), decided to resolve their cases filed by the Federal Housing Finance Agency. They collectively have paid close to $18 billion in penalties.
In her 361- page ruling, Judge Denise L. Cote of Federal District Court in Manhattan wrote that the extent of falsity committed by the two banks was “enormous.” She told the FHFA to propose how much Royal Bank of Scotland and Nomura should pay in the wake of her decision. The agency had initially sought approximately $1.1 billion.
The FHFA accused Nomura of cheating the two mortgage lenders when it sold them $2 billion of bonds that were backed by defective mortgages. It was RBS that underwrote more than half of the securitizations involved.
The two firms argued that the documents related to the bond sales did an adequate job of stating the risks involved and were not misleading. They claimed that any alleged misstatements did not take into account any decisions Freddie and Fannie might have made to purchase the securities. They also blamed the financial crisis for the mortgage lenders losses as opposed to their alleged misstatements.
The huge losses sustained by Fannie Mae and Freddie Mac played a part in the need for the government to take them both over in 2008.
While Cote acknowledged the complexity of the mortgage-backed securities lawsuit, she said the underlying issue was “simple:” Did the defendants, in fact, accurately describe the home mortgage in the securities offering documents at issue or not? She found that they did not.
Cote pointed to examples from Nomura’s files indicating that the bank willingly securitized faulty loans. Meantime, FHFA proved that up to 59% of the loans backing the mortgage-backed securities contained undewriting defects that upped their credit risk.
FHFA has also filed a separate complaint against RBS for its $32 billion of its mortgage-backed securities that it sold to Freddie Mac and Fannie Mae. That mortgage fraud lawsuit will go to trial next year.
The financial crisis of 2008 resulted in massive losses for many investors, with many sustaining financial hits from faulty mortgage-backed securities that were misrepresented and the potential risks involved downplayed. Our securities fraud law firm is here to help investors recoup their losses caused by negligence and fraud. Contact SSEK Partners Group today.
Nomura Holdings and Royal Bank Scotland Lose FHFA’s Mortgage-Backed Securities Case Involving Fannie Mae and Freddie Mac, NY Times, May 11, 2015
Nomura, RBS Defective-Bond Suit Loss Seen Spurring Deals, Bloomberg, May 11, 2015
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