Following a bench trial, Judge Cote today issued a 361-page ruling in favor of FHFA (the conservator to Freddie Mac and Fannie Mae) in a case accusing Nomura and RBS of misrepresenting the quality of mortgages underlying various securities. There had been 16 similar cases before Judge against various banks, all of which settled except this one. Judge Cote resolved various disputes between the parties as to how damages should be calculated, but did not specify the final judgment amount. She instead directed the FHFA, which had initially sought over $1 billion, to submit a proposed judgment following the formula in her opinion. The opinion begins:
This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.
The central falsehood in the documents was the representation that the loans were underwritten in accordance with the loan originators’ guidelines:
At rates ranging from 45% to 59%, the loans within the SLGs had a substantially increased credit risk associated with a failure in the origination process. This number of loans, at a minimum, was not underwritten in compliance with their originators’ guidelines and there were no compensating factors identified by the originator or the experts at trial to excuse that failure. This rate of issuance of defective loans reflects a wholesale abandonment by originators of their underwriting guidelines. FHFA showed that originators not only failed to originate loans generally in compliance with their own guidelines, but that they also more generally failed both to assess the ability of borrowers to meet their monthly mortgage obligations and to assure adequacy of the collateral for the mortgage, despite the representations in the Prospectus Supplements that originators had performed these most basic functions of origination. . . . . Today, defendants do not defend the underwriting practices of their originators. They did not seek at trial to show that the loans within the SLGs were actually underwritten in compliance with their originators’ guidelines. At summation, defense counsel essentially argued that everyone understood back in 2005 to 2007 that the loans were lousy and had not been properly underwritten.