Defending RMBS Lawsuits Alleging that Banks and Mortgage Companies Misled Investors Regarding Lending Standards
Renowned nationwide banking expert witness for plaintiffs and defendants in over 500 cases, former high-level banking executive and banking regulator, and banking consultant to over 80 banks, Don Coker, explains the most effective methods for defending against lawsuits alleging violations of nationwide mortgage banking industry standard policies, practices, principles and procedures for underwriting, originating, selling, and servicing mortgage loans and Residential Mortgage-Backed Securities.
Residential Mortgage Backed Securities ("RMBS") Litigation Overview
● The investments involved in the RMBS lawsuits today are basically adjustable-rate and fixed-rate subprime and Alt-A mortgage loans.
● The RMBS lawsuits were filed by governmental entities, pension and retirement funds, life insurance companies, investment funds, asset managers, investors, and others who wound up owning investments that did not perform as they had anticipated.
● Class-action complaints have been filed as well as individual complaints filed by entities that opted out of class action settlements.
● The complaints allege “massive fraud” in underwriting, originating, and selling pools of mortgage loans primarily through securitized residential mortgage-backed securities transactions.
● Complaints also have been filed against accounting firms that signed off on the RMBS securitizations.
Basically, what happened here is that the investors that now are suing originally were quite impressed by the high yields of the RMBS being offered by the mortgage originators and securitizers. There were many similar RMBS offerings available to the investors at the same time.
Furthermore, virtually all of the RMBS offerings that were available were blessed by high credit ratings from either Moody’s, Standard & Poor’s, or Fitch.
Then the booming housing market that had been rolling along for years collapsed causing the favorable RMBS yields to go away, and the investors that bought the RMBSs are now receiving little or no yield, and they are looking to the parties from whom they purchased the investments to buy them back or otherwise make up for the lost yield on the investments.
Effective Methods for Defending RMBS Cases
● Compare the mortgage loan underwriting standards used in creating the mortgages that make up the RMBS, and opine on how those standards conformed to nationwide industry standards and practices in use at the time.
● Analyze the due diligence, if any, performed by the purchasers of the RMBS. In many cases, the purchasing investor did not even examine the mortgage loans at the time they were purchased.
● Examine the changes in economic data from the time that the RMBS were purchased until the time that the lawsuits were filed in order to demonstrate that the downturn in the economy played a major role in creating the problems.
● Examine the individual loan files and determine potential problem items that could not have been determined by the originator due to the requirements of the lending program of the investor, for example, where a borrower lies about his income, but the purchasing investor’s program guidelines prohibit the originator from verifying the borrower’s income. Same applies to the borrower’s assets and liabilities.
● Point out that the purchasing investor failed to act to protect itself by examining mortgage loans purchased from the originator before the purchasing investor sold the purchased loans in the secondary market, such as to Fannie Mae or Freddie Mac or some other investor.
● Point out that the alleged underwriting problems complained of by the purchasing investor were also, in many cases, overlooked or judged as unimportant by a mortgage insurance company, FHA, Fannie Mae, Freddie Mac, and possibly others.
● If the purchasing investor has similar problems and complaints against other mortgage originators, then this indicates a pattern and practice of recklessness in their acquisition of investments.
● If loss projections occurred due to faulty assumptions and inaccurate numbers, then that requires further examination, explanation, and a comparison to what is reasonable and what is not. However, if the problems that occurred are the result of some unforeseeable event that occurred after the transaction was negotiated, or the intervention of circumstances that were reasonably unforeseeable, then it is more difficult to place blame on the originators.
● How important the projections were to an investor’s decision will also be weighed, even though this is often subjective and impossible to quantify.
● Engage competent expert witness assistance that can provide a credible contextual overview of the situation extant in the industry at the time of the originations, and also address due diligence standards that should be observed by investors buying the RMBS investments.
© 2012 by Don Coker.
ABOUT THE AUTHOR: Nationwide Mortgage Banking 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 expert witnesses recommended to both DRI and AAJ.
Clients have included numerous individuals, 80 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. Don Coker serves clients worldwide from his Atlanta metro area office.
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.