Bond Insurer Litigation v Residential Mortgage-Backed Securities (RMBS) Issuers over Alleged Misrepresentation

In addition to the prolific on-going litigation between mortgage investors and mortgage originators over mortgage repurchase demands based upon allegedly breached representation and warranty claims in correspondent and other mortgage purchase agreements, the same set of facts has given rise to another layer of litigation: Bond insurers suing the entities that aggregated the mortgage loans and converted them into mortgage-backed securities insured by the bond insurers.

According to the bond insurers, the entities that securitized the mortgage loans perpetrated a massive fraud that deceived investors as well as financial guarantors such as the bond insurers leading them to believe that the underlying mortgage loans backing the securitizations were originated pursuant to established and prudent underwriting guidelines that would result in the origination of only high quality mortgage loans.

The bond insurers now say that the mortgage companies’ and securitizers’ representations and warranties about their quality control and due diligence processes were untrue and misleading, and that their actual operating policies were aimed at maximizing loan volume regardless of loan quality.

Essentially, the bond insurers now claim that the issuers of the mortgage-backed bonds misrepresented the quality of the mortgage loans whose payments provide the funds to make the payments to the bondholders. This often is described as “material misrepresentations and omissions” about the underlying mortgage loans that back the securities, and that are purported to have proximately caused the losses on the mortgage-backed securities.

And of course, this leads to the follow-up issue of whether the entity that purchased the mortgages and issued the bonds is responsible for quality control, or does the responsibility lie with the mortgage originators from whom the bond issuing entity purchased the mortgages?

And you can take it a step further and ask if you are an insurer that is going to insure the quality of the payment stream to the bondholders that is derived from the underlying mortgage loans, then doesn’t it behoove the insurer to perform some due diligence by taking a look at the quality of the underlying loans?

My experience has been that each one of these insurer versus mortgage-backed securities issuer situations is unique and has to be examined on its own.

Recognizing that document names can vary from transaction to transaction, and that some transactions have documents that others do not, a typical securitization might include the following documents that should be examined by an expert:

● Loan Purchase Agreement, that may include Addenda defining the criteria for the loans that the Purchaser will purchase. This document may be called a Master Loan Purchase and Servicing Agreement.
● A Correspondent Manual or some other similar document that defines the criteria for the loans that will be purchased.
● Pooling and Servicing Agreement.
● Assignment, Assumption and Recognition Agreement.
● Prospectus filed with the Securities and Exchange Commission.

The keys to untangling this mess and assigning responsibility are two-fold:

1. Have an experienced expert witness examine the documents establishing the relationship between the insurer and the mortgage-backed securities issuer or securitizer and provide an opinion as to who is responsible for what, and if the relationship that is established conforms to nationwide industry standard policies, practices and procedures for mortgage-backed securities transactions.
2. Have an experienced expert witness examine the quality of the underlying mortgage loans and provide an opinion as to whether they conform to the nationwide industry standard policies, practices and procedures for mortgage loans that were being originated at that time.

© 2012 by Don Coker. Serving clients worldwide from his Atlanta metro area office.

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ABOUT THE AUTHOR: Banking, Mortgage Banking and Lending Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School. Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.