A recent bankruptcy court decision could have “profound effects on structured finance transactions,” according to one ratings agency. Meantime, billions of dollars in other mortgage-backed securities cases continued.
While litigation tied to the FirstPlus Home Loan Owner Trusts has mostly been settled, a district court decision was reversed on Aug. 7, 2009, by the Eighth Circuit Court of Appeals, Fitch Ratings reported. As a result, the amount of potential liability has significantly increased to the trusts in four Missouri class actions.
And in separate Arkansas litigation, the Greene County District Court ruled in December 2009 in favor of the plaintiffs’ claim that the interest paid on the mortgage notes was exorbitant and that the class members are entitled to recovery from the trusts.
The actions led the trustee to suspend payments beginning in October. Fitch said it cannot currently quantify the amount of potential liability to the securitizations, which where issued in 1997 and 1998.
A Jan. 25 decision by the U.S. Bankruptcy Court in New York could “have profound effects on structured finance transactions because it challenges long-held assumptions relating to the subordination of swap termination payments to a swap counterparty following a swap counterparty bankruptcy,” Moody’s Investors Service warned. The decision was tied to the Dante collateralized-debt obligation in the Lehman Brothers bankruptcy proceedings.
The judge “held that the market-standard assumptions relating to the subordination of swap termination payments owed to a swap counterparty following a swap counterparty bankruptcy are unenforceable under the U.S. Bankruptcy Code,” Moody’s said. “From a credit perspective, Judge Peck’s ruling has important implications because it contravenes what have been longstanding market assumptions as to the enforceability of the documents as agreed to by the parties at the beginning of the transaction, and more specifically, the priority of payment provisions.”
The ratings agency noted that individual implications — which will be far-reaching — will depend on multiple factors and require deliberate and case-specific analysis.
Moody’s and rival Standard and Poor’s Ratings Services won a dismissal of a lawsuit filed in U.S. District Court in New York by investors on $100 billion in MBS, Bloomberg reported. The plaintiffs claimed the two ratings agencies misled them by disregarding ratings guidelines, operating in conflicting roles and sacrificing independence.
In King County Superior Court, Wash., the Federal Home Loan Bank of Seattle filed almost a dozen lawsuits last month against companies that were tied to the issuance of mortgage-backed securities the FHLB invested in. Among the defendants are Banc of America Securities, Countywide Financial Corp. and Barclays Capital Inc. Also listed as defendants are Bear Stearns & Co. Inc., Morgan Stanley & Co. Inc. and Goldman Sachs & Co. as well as UBS Securities, Deutsche Bank Securities Inc. and Merrill Lynch Mortgage Capital Inc.
A report from the New York Post indicated that the government-sponsored enterprise seeks $2 billion because of misleading statements on MBS it invested in. The defendants allegedly issued misleading statements about the quality of underwriting, originators and quality control, according to the FHLB.
The cases have reportedly been transferred to federal court.
State Street Bank and Trust Co. has agreed to a $300 million settlement with the Securities and Exchange Commission, according to an SEC cease-and-desist order. The settlement is in addition to nearly $350 million already paid by State Street to settle private investor claims. The company is accused of violating Section 17(a)(2) and Section 17(a)(3) of the Securities Act.
In 2007, State Street allegedly misled investors about the share of subprime residential MBS in some of the unregistered funds it managed. One fund was almost entirely invested in or exposed to subprime RMBS, though State Street reportedly described it as “having better sector diversification than a typical money market fund.” Investors allegedly lost hundreds-of-millions of dollars because of the company’s conduct.
A class-action was filed in U.S. District Court for the Central District of California on behalf of RMBS investors of issuances sponsored by Countrywide Financial Corp. and Countrywide Home Loans Inc., Coughlin Stoia Geller Rudman & Robbins LLP announced. Impacted securitizations were issued between 2005 and 2007.
“Countrywide, certain officers and directors of CWALT, CWABS, CWMBS and CWHEQ, and certain investment banks, which served as underwriters of the Certificates, violated the Securities Act by issuing the certificates pursuant to registration statements and prospectus supplements that misrepresented the quality of the underlying mortgages that had been pooled and placed in the issuing trusts,” the announcement said. “The representations made in the company’s prospectus supplements were materially false and misleading because at the time of the certificates offerings, Countrywide’s underwriting standards were not designed to evaluate a borrower’s ability to repay or the true value of the mortgaged property underlying the certificates.”
Bank of America Corp. is seeking dismissals of lawsuits filed in U.S. District Court for the Southern District of New York by BNP Paribas Mortgage Corp. and Deutsche Bank AG over $1.6 billion in alleged losses on asset-backed notes, Bloomberg reported. The securities involved loans originated by Taylor, Bean & Whitaker Mortgage Corp. and issued by Ocala Funding LLC. As trustee, BoA claimed that it wasn’t required to monitor Ocala’s use of the funds or to evaluate the entity’s assets and liabilities before complying with withdrawal requests.
Federal Home Loan Bank of Seattle v. Bear Stearns & co Inc, et al.
Case No. 09-2-46298-4 SEA, Dec. 23, 2009 (King County Superior Court, Wash.)
Federal Home Loan Bank of Seattle v. Banc of America Securities, et al.
Case No. 09-2-46319-1 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Barclays Capital Inc., et al.
Case No. 09-2-46320-4 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Countrywide Securities Corp., et al.
Case No. 09-2-46321-2 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. RBS Securities Inc., et al.
Case No. 09-2-46347-6 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al.
Case No. 09-2-46348-4 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Goldman Sachs & Co., et al.
Case No. 09-2-46349-2 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. UBS Securities, et al.
Case No. 09-2-46350-6 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Deutsche Bank Securities Inc., et al.
Case No. 09-2-46351-4 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Merrill Lynch, et al.
Case No. 09-2-46352-2 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
Federal Home Loan Bank of Seattle v. Credit Suisse First Boston Mortgage Securities Corp., et al.
Case No. 09-2-46353-1 SEA, Dec. 23, 2009 (King County Superior Court, Wash.).
In re. Countrywide RMBS.
Civil action number 10-cv-00302-SJO-PJW (U.S. District Court for the Central District of California).
Deutsche Bank v. Bank of America.
Case No. 09-cv-9784 (U.S. District Court, Southern District of New York).
BNP Paribas v. Bank of America.
Case No. 09-cv-9783 (U.S. District Court, Southern District of New York).
