Several recent New York cases involving securitized-mortgage trusts have dealt setbacks to the trusts seeking to enforce contractual rights against the sellers of the mortgages for breach of warranties. See, e.g., Lehman XS Trust, Series 2006-4N, by U.S. Bank, as Trustee v. Greenpoint Mortgage Funding, 2014 WL 108523 (S.D.N.Y. 2014); Home Equity Asset Trust 2007-1 v. DLJ Mortgage Capital, 2013 WL 6997183 (N.Y. Sup. Court, Jan. 15, 2014); Home Equity Asset Trust 2006-5 (Heat 2006-5) v. DLJ Mortgage Capital, 2014 WL 27961 (N.Y. Sup. Court, Jan. 3, 2014); ACE Securities v. DB Structured Products, 977 N.Y.S.2d 229, 112 A.D.3d 522 (1st Dept. 2013) (reversing denial of motion to dismiss by the trial court); Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2005-S4, by HSBC Bank USA, as Trustee v. Nomura Credit & Capital, 2013 WL 2072817 (N.Y. Sup. Ct. May 10, 2013). Almost unanimously, the courts have been holding that such suits by the trusts are barred by the applicable six-year statute of limitations on breach of contract actions despite contractual language that purports to establish the accrual of the claims not at the time the warranties are made but at a later period. To the extent the decisions are upheld on appeal, they may signal the tail end of the exposure faced by the sellers of the mortgages to the trusts for breach of warranties regarding the credit quality of the mortgages sold prior to the financial crisis of 2008, the peak of sales activity and perceived abuses in connection with such sales.1

The Securitization Process

The securitization of mortgages involves the purchase of pools of mortgages from a seller that either purchases the loans from third parties or originates the loans itself. The pool of mortgages is deposited into a trust; it is securitized and subsequently resold to investors in the form of certificates. The seller of the pooled mortgages typically warrants the credit quality and several other characteristics of the underlying loans in the agreement to sell the loans, referred as the Mortgage Loan Purchase Agreement (MLPA). The MLPA sets forth the rights of the trust in the event of a breach of the warranties or representations made by the seller in connection with the loans. It typically provides that if the seller breaches a representation and “it is determined that such breach affects the value of the [loans] or the interest of the purchaser,” then the seller must either cure the breach or repurchase the affected loan. Lehman XS Trust, 2014 WL 108523 at *2. The MLPA may further provide:

Any cause of action against the Seller relating or arising out of the Breach of any representations and warranties … shall accrue as to any mortgage loan upon (i) discovery of such Breach by the Purchaser (ii) failures by the Seller to cure such Breach or repurchase such Mortgage Loan … and (iii) demand upon the Seller by the Purchaser for compliance with this Agreement.