Five years after the collapse of the U.S. housing market, the fight continues over who should be liable for the losses on mortgage-backed securities (MBS). The banks that issued the securities told the investors who bought them that the MBS would have guaranteed yields, since they were supported by the mortgage payments of millions of homeowners. But as growing numbers of Americans were unable to make their payments, MBS yields plummeted, and many parties went to court. The banks have aggressively defended themselves in order to postpone and earn their way out of any losses. But MBS contracts contain extensive representations and warranties as to the quality of the mortgage loans. These contract clausesknown as rep and warranty claims, or putbacksmake the banks responsible for buying the mortgages back if the underwriting is substandard.
Will judgment day come for the banks? In the following articles, we take a look at the leading case in each of the three main areas of MBS litigation. Among the claims that investors have lodged against banks, the biggest case involves securities issued by Countrywide Financial Corporation, which was acquired by Bank of America Corporation in 2008. BofA has negotiated a deal to settle all Countrywide claims for what amounts to about 8 cents on the dollar, but some investors have challenged that amount as too low. Approval for the settlement must come from Judge Barbara Kapnick in New York state court.
Another raft of claims has been brought by the monoline insurers who provided liability coverage to the banks for their mortgage-backed securities. The banks say that investors MBS losses should be covered by the insurers; the insurers counter that its the banks who should pay. U.S. District Judge Jed Rakoff of Manhattan sided with one insurer when he ruled in February in Assured v. Flagstar, the first insurer case to go to trial.
Finally, the Federal Housing Finance Agency is waiting to find out whether it can proceed with claims that it brought on behalf of Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), which were among the biggest purchasers of nonprime MBS. The issuing banks maintain that the FHFA waited too long to bring its claims. U.S. District Judge Denise Cote disagreed when she ruled in a case involving UBS AG; the issue is now before the U.S. Court of Appeals for the Second Circuit.
The most prominent of the ongoing cases involving a single MBS issuer is Bank of America's proposed settlement of putbacks relating to mortgages that were originated, packaged, and sold as mortgage-backed securities by Countrywide.
Thanks to a bellwether $100 million judgment that Assured Guaranty Corp. won against Flagstar Bancorp Inc. this past February, monoline bond insurers now have the upper hand in the suits that they've brought against MBSissuing banks.