Repurchase Litigation Ledger

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MORTGAGE EXPERT
12 · 27 · 10

Investors, issuers and originators having been taking their disputes over repurchase demands and other repurchase issues to the courts.

MBIA Insurance Co. sued Morgan Stanley in a New York court this month for allegedly fraudulently inducing MBIA to issue insurance on mortgage-backed securities that Morgan Stanley sold to investors. MBIA alleges that Morgan Stanley made false representations and warranties about its underwriting standards. MBIA is seeking to be made whole for the $223 million of MBS that MBIA insured and Morgan Stanley refused to repurchase.

The case is currently pending in the Supreme Court of the State of New York, Westchester County.

To date, MBIA has sued Bank of America Corp. and subsidiary Countrywide Financial Corp.; GMAC Mortgage; Residential Funding Co. LLC; the Federal Deposit Insurance Corp. as conservator of IndyMac Federal Bank; Merrill Lynch; and Credit Suisse Securities.

Generally, as in the Morgan Stanley case, MBIA alleges that the other companies deceived it into believing that the securities it insured were of high quality when they were not.

A federal lawsuit was filed last month in California by Lehman Brothers Holding Inc. against Nationsfirst Lending Inc. alleging that the company failed to honor various contracts requiring the repurchase of faulty mortgage loans. The loans at issue allegedly misrepresented borrowers’ identities and occupancy intentions and involved kickbacks to loan officers.

Nationsfirst is just one of the cases Lehman Brothers is bringing against banks it worked with before going bankrupt in 2008.

Lehman is also suing Fairway Independent Mortgage Corp. alleging that the bank misrepresented borrower debt in loans Lehman acquired and that the bank won’t buy back the bad debt. Lehman bought several mortgage loans from Fairway that the holding company feels had “material problems,” such as misrepresentations of a borrower’s debt.

A complaint was filed in September by The Charles Schwab Corp. in U.S. District Court for the Northern District of California against Citigroup Inc. and a number of other banks alleging that the defendants issued false and misleading statements about the underwriting practices with regard to $1.3 billion in MBS that Schwab bought from them.

Specifically, Schwab took issue with the loan-to-value ratios and the appraised values of the securitized loans. Schwab seeks to recoup the full amount that it paid for the MBS certificates.

A federal lawsuit filed by Universal Mortgage Corp. against Wurttembergische Versigh alleges that the defendant reneged on a mortgage bankers blanket bond issued by Wurttembergische and certain underwriters at Lloyds of London. While the bond indemnified Universal for direct losses caused by employee dishonesty, it also provides for a number of exclusions from coverage — including “any loss resulting from the assured having repurchased or having been required to repurchase a real estate loan from an investor or secondary market institution.”

But Universal claimed that the loss didn’t result from the repurchase, but from the disbursement of its own proceeds in the form of loans to unqualified borrowers. However, the court found that Universal didn’t suffer any financial harm until it was forced to make the repurchases.

In U.S. District Court for the Central District of California, MBS investors filed a putative class action against Countrywide in January alleging that parent BofA was not justified in denying $352 billion in repurchase demands on loans where Countrywide is accused of misrepresenting its documentation practices. But the court granted BofA’s motion to dismiss without prejudice, ruling that the statute of limitations barred some of the claims and that the lead plaintiffs lacked standing for many of the other claims, as the plaintiffs had not purchased all 427 offerings.

The ruling reduced BofA’s exposure to just 22 offerings for $31 billion.

A second complaint was filed by the plaintiffs against BofA on Dec. 6.

Loan Star Fund V LP sued Barclays Bank PLC in January alleging the sellers misrepresented that the mortgage trusts had no delinquent loans when the investors purchased the securities. But, on review, the court affirmed a case dismissal because the investors failed to allege a misrepresentation in light of the “repurchase or substitute” clauses in the securities contracts. The court found that some delinquent mortgages were in the pool but could be repurchased without making the entire transaction fraudulent.

This story was written using case summaries provided by Patton Boggs LLP.

MBIA Ins. Co. v. Morgan Stanley.
Index No. 29951-10, December 2010 (N.Y. Sup. Ct. 2010).

Lehman Brothers Holding, Inc. v. Nationsfirst Lending Inc.
Case No. 10CV1753, Nov. 15, 2010 (U.S. District Court, Central District of California).

The Charles Schwab Corp. v. BNP Paribas Securities Corp.
Case No. 3:2010cv04030, Sept. 8, 2010 (U.S. District Court for the Northern District of California).

Universal Mortg. Corp. v. Wurttembergische Versigh.
LEXIS 77975, July 30, 2010 (U.S. District Court).

Maine State Ret. Sys. v. Countrywide Fin. Corp.
Case No. 2:10-cv-00302-MRP-MANx, Jan. 14, 2010 (1st complaint) (U.S. District Court, Central District of California).

Lone Star Fund V (US), LP v. Barclays Bank PLC.
Case No. 594 F.3d 383, Jan. 11, 2010.

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