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Financial Services Law Insights and Observations

Bank subsidiary to pay $604 million for RMBS defects

Courts RMBS Mortgages


On January 25, the Supreme Court of the State of New York ordered an investment bank subsidiary (defendant) to pay nearly $604 million, plus pre-judgment contractual interest, to an insurance company (plaintiff) for allegedly breaching the representations and warranties contained in a pooling and servicing agreement (PSA) for mortgages contained in the residential mortgage-backed securities (RMBS) it sold in 2007. According to the November 2020 post-trial order, the plaintiff issued irrevocable insurance policies that “unconditionally guaranteed payment of principal and interest to certificate holders of the RMBS transactions.” After the 2008 financial crisis, 51 percent of the original loan balances of the related mortgages held in the insured trust defaulted, and in July 2009, the plaintiff began to send mortgage repurchase demand letters to the defendants. Following the defendant’s refusal to repurchase the loans, the plaintiff subsequently commenced the action, alleging that the defendant breached the representations and warranties contained in the PSA. At trial, the trial court concluded that the plaintiff “convincingly proved” that “more than half of the securitized loans were materially non-conforming” and should be awarded compensation for its losses, as the plaintiff “did not assume the risk of loss that [the non-confirming loans] posed.” However, the court further determined that the plaintiff could not recover damages that were not “directly attributable to the materially non-confirming loans.” After directing the parties to file letters addressing remaining issues before the entry of monetary judgment, the court determined that the repurchase date for determining damages should be 90 days after the repurchase trigger (the date of notice from plaintiff) and not the date of breach. Therefore, based on a repurchase date of October 28, 2009, the court ordered the defendant to pay nearly $604 million in damages to the plaintiff.