Nomura and Royal Bank of Scotland were censured by a U.S. judge on Monday for allegedly misleading Fannie Mae and Freddie Mac while selling defective mortgage-backed securities. The court ruling against Nomura and RBS may encourage other banks to settle mortgage-related suits brought by regulators and private investors rather than face the bad publicity and cost of an adverse judgment.
Fannie Mae and Freddie Mac: Court sets damages formula
In her 361-page opinion, U.S. District Judge Denise Cote in Manhattan said Nomura and RBS sold flawed securities to government-owned mortgage companies. After a three-week trial, she said the banks misled Fannie Mae and Freddie Mac and set a damages formula that may result in the government winning about half its original claim of $1 billion.
Calling the sale an “enormous” deception, Cote, who heard the case without a jury, wrote on Monday, “The offering documents didn’t correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.”
The judge ordered the Federal Housing Finance Agency, which filed the case, to propose how much the banks should pay as a result of her ruling. The judge also rejected the banks’ claim that the housing crash, and not defects in the loans, was responsible for the collapse of the mortgage-backed securities.
Expressing satisfaction over the ruling, the FHFA said it “looks forward to submitting proposed damages.”
While Nomura indicated that it was consistently candid and professional in all of its dealings with Fannie Mae and Freddie Mac, a U.K.-based spokeswoman for RBS declined to comment on the decision.
Nomura’s lackluster due diligence program
Monday’s verdict is the first in a case that has lasted almost four years and seen the world’s biggest banks pay over $20 billion to settle allegations of pre-crisis wrongdoing. The FHFA, conservator to Fannie and Freddie, sued 19 financial institutions in 2011. Seventeen of the institutions, ranging from JPMorgan to Barclays, have agreed to pay over $20 billion to settle allegations that they mis-sold securities to Fannie and Freddie.
As reported by ValueWalk, last year Goldman Sachs agreed to settle with the FHFA on claims regarding private-label mortgage-backed securities the investment bank had sold to Fannie Mae and Freddie Mac between 2005 and 2007. During the trial, the FHFA pointed to internal emails sent at the banks. The emails from Nomura’s executives suggested Japan’s biggest investment bank might be aware it was selling troubled mortgage-backed securities. One e-email described some of its mortgages as “crap.”
Judge Denise Cote said, “The reason for Nomura’s lackluster due diligence program is not hard to find,” as the bank sought to foster a “good relationship” with mortgage lenders and ignored “specific warnings about the risk of working with an originator.”
The seven deals at issue in Nomura’s case were issued from 2005 and 2007. While Nomura was the securities’ sponsor, RBS underwrote four of the deals. Though the exact amount of damages to be awarded was unclear, citing figures previously submitted, Cote said the FHFA was entitled to $624.4 million, minus over $178 million in payments it received since launching the lawsuit in 2011.
RBS was sued separately by the FHFA in federal court in Connecticut for selling $32 billion of its own mortgage-backed securities to Fannie Mae and Freddie. This case is coming up for trial next year.