InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New York Federal Court Certifies Class in MBS Litigation
On June 29, the U.S. District Court for the Southern District of New York granted the plaintiffs motion to certify a class in a putative class action concerning the sale of mortgage backed securities (MBS) by an investment bank. Tsereteli v. Residential Asset Securitization Trust 2006-A8, No. 08 Civ. 10637, 2012 WL 2532172 (S.D.N.Y. June 29, 2012). In Tsereteli, the plaintiffs alleged that the sale of the MBS violated the Securities Act of 1933, because the offering documents falsely represented that the underlying mortgage loans were originated in accordance with the lenders underwriting standards. According to the plaintiffs, the lender had in fact abandoned its underwriting standards and routinely made loans to borrowers who were unable to meet their repayment obligations. The bank, among other things, argued that Rule 23s predominance requirement was not met because certain sophisticated investors were aware of the alleged misstatements when they purchased the securities. The court, however, found that [g]eneral investment sophistication of certain class members does not show that any of the class members knew anything at all about [the lenders] alleged deviation from its underwriting guidelines.
New York State Appeals Court Upholds Decision Dismissing Buyback Lawsuit
On June 28, the Appellate Division of the Supreme Court of New York, First Department unanimously confirmed the New York Supreme Courts dismissal of a mortgage-buyback lawsuit brought by investors against a bank, holding that the investors action was barred by the no-action clause in the Pooling and Servicing Agreements (PSAs). Walnut Place LLC v. Countrywide Home Loans, Inc., No. 8046, 650497/11, 2012 slip op. 0521 (N.Y. App. Div. June 28, 2012). The Appellate Division found that the no-action clausea clause limiting the right to suewas not ambiguous and only allowed investors to sue under an event of default provision which was not applicable under the set of facts before the court. The case was brought by several entities collectively known as Walnut Place LLC, who had invested more than $1 billion in securities backed by the banks mortgages. The investors claimed that the bank made false representations about the characteristics and credit quality of loans underlying the securities in the PSAs.
Fannie Mae Announces Private Transfer Fee Covenant Policy, Revises Loan Modification Agreement
On June 19, Fannie Mae issued the Selling Guide Announcement SEL-2012-05, which states that effective July 12, 2012, Fannie Mae will not purchase or securitize mortgages on properties encumbered by private transfer fee covenants that were created on or after February 8, 2011, with some exceptions. The policy follows a rule finalized by FHFA on March 16, 2012 that prohibits Fannie Mae and Freddie Mac from purchasing or investing in any properties or securities backed by such mortgages. In light of the new policy, mortgages on affected properties must be purchased by Fannie Mae as whole loans no later than July 13, 2012, or must be delivered no later than July 13, 2012 into MBS pools with issue dates of July 1, 2012 or later. The policy requires lenders to establish their own policies and procedures to ensure compliance. On June 20, Fannie Mae published a Servicing Notice to advise servicers to begin using a new Loan Modification Agreement that was updated to include a line for the date of the lenders signature. The new form must be used for all Trial Period Plans beginning on or after September 1, 2012.
Federal District Court Allows Interlocutory Appeal of Challenge to FHFA MBS Suit
On June 19, the U.S. District Court for the Southern District of New York granted defendants motion to certify an interlocutory appeal from a portion of the courts earlier denial of their motion to dismiss as untimely the FHFAs claims under the 1933 Securities Act. Fed. Hous. Fin. Agency v. UBS Americas, Inc., No. 11-5201, 2012 WL 2324486 (S.D.N.Y. June 19, 2012). On May 4, 2012, the court denied, in large part, the defendants motion to dismiss the FHFAs claims alleging that billions of dollars of MBS purchased by Fannie Mae and Freddie Mac were based on offering documents that contained materially false statements and omissions. The suit was selected to proceed first among the 18 such suits brought by the FHFA. In this most recent decision, the court reasoned that resolution of issues relating to the timeliness of the claims will remove a cloud of legal uncertainty that hangs over the other 17 actions in this suite of cases by clarifying the impact of the Housing and Economic Recovery Act of 2008 on the statute of limitations in the Securities Act of 1933 and, as a consequence, defining the scope of discovery.
State AGs Granted Right to Intervene in Private MBS Action
On June 6, a New York state court ordered that the attorneys general for the states of Delaware and New York (state AGs) could intervene in a case challenging an $8.5 billion settlement related to allegations that the originator and servicer of certain mortgage backed securities breached obligations owed to the trusts. In re Application of The Bank of New York Mellon, No. 651786/11, slip op. (NY Sup. Ct. Jun 6, 2012). The trustee is seeking state confirmation that it had authority to enter into the settlement agreement and in so doing did not violate its duties under the trust agreements and state law. A group of institutional investors moved to challenge the settlement, and in a decision earlier this year the Second Circuit reversed a federal district court and held that the case fell within the securities exception to both original and appellate jurisdiction under the Class Action Fairness Act of 2005 and should proceed in state court. The federal district court also had granted a motion to intervene filed by the state AGs, holding that they could appropriately intervene to represent the interests of absent investors. The court reasoned that the state AGs had "parens patriae standing" to preserve an "honest marketplace." On remand in state court, the state AGs renewed their motions to intervene. In granting intervention, the state court rejected arguments made by the trustee and the institutional investors that the state AGs lack parens patriae standing, and that the state AGs are not seeking any injunctive relief to protect any quasi-sovereign interests. Instead, the court followed the prior federal court decision and held that the state AGs identified legitimate quasi-sovereign interests sufficient to provide standing to intervene.
RMBS Working Group Announces Web Site, Formation of Coordination Team
On May 24, the Residential Mortgage-Backed Securities (RMBS) Working Group announced the launch of a new web site to facilitate the reporting of RMBS fraud, as well as the formation of a coordination team “to facilitate various investigations underway around the country.” For more information on the RMBS working group, see InfoBytes, Jan. 27, 2012.
New York Federal Court Denies Motion to Dismiss FHFA Mortgage-Backed Securities Case
On May 4, the U.S. District Court for the Southern District of New York denied, in large part, a motion to dismiss one of the many pending mortgage-backed securities (MBS) cases brought by the Federal Housing Finance Agency (FHFA). Federal Housing Finance Agency v. UBS Americas, Inc., No. 11-5201, 2012 WL 1570856 (S.D.N.Y. May 4, 2012). The court’s decision allows FHFA’s federal securities action to proceed while dismissing related state law negligent misrepresentation claims. In July 2011, as conservator for Fannie Mae and Freddie Mac (the GSEs), FHFA initiated multiple lawsuits alleging that billions of dollars of MBS purchased by the GSEs were based on offering documents that “contained materially false statements and omissions.” Defendants in the instant case argued that these claims were time-barred. FHFA countered that the Housing and Economic Recovery Act of 2008 (HERA) controlled questions of timeliness, a point on which the court agreed in refusing to dismiss related federal claims. In this regard, the court concluded that a reasonably diligent plaintiff (here, the FHFA) could not have “discovered” the underlying federal claim within the year before the GSEs were placed into conservatorship. Rather, such a plaintiff could only have “discovered” this claim when the securities were “downgraded from investment grade to near-junk status,” which was less than a year before conservatorship.
Fannie Mae Announces Changes to Pricing Terms
On May 1, Fannie Mae updated terms pertaining to its ability to change the pricing applicable to lenders’ deliveries of mortgage loans under the standard Selling Guide provisions, as well as under existing Master Agreements and related MBS contracts. In Announcement SEL-2012-03, Fannie Mae stated that it may change the base guarantee fee, loan-level pricing adjustments, and/or guaranty fee adjustments for MBS Express or rapid payment method remittance cycles applicable to mortgages delivered under MBS contracts or as whole loans. Under the change (i) Fannie Mae reserves the right to change the pricing one or more times during the term of a Master Agreement or related MBS contract, (ii) Fannie Mae will provide the lender with written notice of the pricing change prior to it taking effect, and (iii) either party can cancel the affected contract or agreement if the parties are unable to come to terms on the new pricing. The effective date of the changes will be no later than October 1, 2012.
Second Circuit Affirms Denial of MBS Class Certification Given Limited Record
On April 30, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of an action brought by a putative class of pension fund investors against issuers of certain mortgage-backed securities. New Jersey Carpenters Health Fund v. Rali Series 2006-QO1 Trust, No. 11-1683, 2012 WL 1481519 (2nd Cir. Apr. 30, 2012). The investors claimed that the issuers made false and misleading statements in the prospectuses of the MBS at issue, and brought suit to recover damages under the Securities Act. In denying the investors’ motion for class certification, the district court held that class treatment was not appropriate because individual issues predominate - each purchaser’s actual knowledge of the specific false or misleading statements or omissions would need to be determined on an individual basis. Based on the “limited evidence” available “without the benefit of discovery,” the circuit court affirmed the dismissal, but suggested that a different inference could have been drawn on a more complete record. The court also acknowledged several district court decisions that followed the instant case, in which the courts certified classes presenting similar claims.
Fannie Mae Alters Policies for Preforeclosure Sale Process, Delinquency Management, Default Prevention
On April 25, Fannie Mae issued Servicing Guide Announcement SVC-2012-06, which sets new policies and clarifies several delinquency management and default prevention requirements related to (i) electronic submission of borrower response package documents, (ii) income documentation for employed borrowers, (iii) determining monthly gross income, (iv) modifications of loans secured by leasehold estates, (v) property valuation, and (vi) executing and recording modification agreements. The majority of the changes are effective immediately. The new requirements for determining income are effective for loans evaluated on or after July 1, 2012.
On the same date, Fannie Mae also published Announcement SVC-2012-07 to establish new policies to expedite the preforeclosure sale process. For all conventional mortgage loans held in Fannie Mae's portfolio, those purchased for Fannie Mae's portfolio but subsequently securitized into Fannie Mae MBS pools, and those originally delivered as part of an MBS pool, the policies (i) establish maximum required response times for preforeclosure sale offers submitted for consideration, (ii) require servicers to provide borrowers with status updates during the evaluation process, and (iii) allow servicers to respond to unsolicited preforeclosure sale offers without first requiring an evaluation for a HAMP modification. Servicers are encouraged to adopt these policies immediately, but must do so no later than June 25, 2012. The Announcement reminds servicers that Fannie Mae may pursue any of its available remedies for failure to comply with these new policies.