Common Threads in Mortgage-Backed Securities Cases
Four years past the beginning of the collapse of the U.S. housing market, there are scores of class action and individual lawsuits involving the origination and securitization of residential mortgage-backed securities (RMBS).
Monoline insurers and private RMBS investors are filing individual and class actions against issuers of securities, loan originators, and securities underwriters; in other cases, government-sponsored entities are doing the filing. The U.S. Federal Housing Finance Agency, for instance, sued 18 of the world’s largest banks on behalf of Fannie Mae and Freddie Mac, claiming the financial institutions misstated or omitted material information concerning $200 billion worth of securities sold to Fannie and Freddie.
The RMBS securitization process is complex, involving a chain of transactions and multiple players, including loan originators, securities issuers and underwriters, due-diligence service providers, credit-rating agencies, and insurers. In RMBS disputes, litigators and economic experts must not only isolate the factors that are relevant for determining liability and damages, and, in the event of class actions, for addressing certification issues, but also consider those factors within the context of varying industry practices, disclosures in offering documents, levels of investor sophistication, and U.S. housing, mortgage, and RMBS markets.
Analysis Group has a long history of working on complex securities and mortgage-backed securities matters. Recently, we have been working on a range of RMBS cases related to the financial crisis and housing market collapse, including
New Jersey Carpenters Vacation Fund, et al. v. The Royal Bank of Scotland Group, plc, et al., a matter in which certification was denied to a putative class of institutional investors in part because experts were able to point out the disparity of investor sophistication and knowledge among members of the class. While the parties, circumstances, and amounts vary from case to case, there are two primary issues in RMBS matters:
Allegations of misrepresentation. In many of these cases, there are claims that the banks’ offering documents have omitted information or contain false or misleading statements about the underlying collateral – for instance, whether the loans were originated in accordance with stated underwriting guidelines and whether information about property appraisals, loan-to-value ratios, or borrower incomes is accurate. These sorts of allegations were central to RMBS litigation involving The Royal Bank of Scotland, IndyMac Bank, Merrill Lynch, Washington Mutual, Countrywide, and others. For instance, the IndyMac plaintiffs, a putative class of investors in mortgage pass-through certificates publicly offered by IndyMac between 2005 and 2007, contended that the offering documents for the certificates did not provide adequate information about Indy-Mac's underwriting practices. IndyMac "relied upon faulty appraisals of the underlying real estate that were not made according to [industry standards] and oftentimes grossly overvalued the property/collateral," they alleged.