Megabank executives don’t make for great legal forecasters. But that hasn’t stopped them from trying.
Just a few months ago, industry chiefs asserted that plaintiffs in mortgage backed securities litigation needed to prove that their losses weren’t a result of a macroeconomic catastrophe — namely, the housing collapse. Demonstrating that would be “pretty tough,” JPMorgan Chase & Co.’s Jamie Dimon told bank analysts. Over the past year, many of his peers have made the same argument.
Unfortunately for the industry, it now appears that a key group of plaintiffs won’t need to prove that underwriting flaws, rather than broader economic forces, were the central cause of their losses.
In a Tuesday New York Supreme Court ruling, Judge Eileen Bransten found that a monoline insurer, MBIA Inc., must demonstrate only that Countrywide Financial Corp., now a part of Bank of America, tricked it into insuring loans it otherwise wouldn’t have touched.
“This corresponds to a standard claim for fraud, in which fraud is complete when a misrepresentation is made that induces a party to take action and that party suffers damages as a result,” the judge wrote in an opinion expected to shape other monoline suits.
The ruling could have been worse for the big banks. Because Bransten based it on insurance contracts rather than bond offering documents, the decision isn’t ideal ammunition for the broader field of private mortgage securities litigation.
But it’s still pretty bad for B of A and its brethren. Bransten didn’t rule out the possibility that MBIA could win a case based on the offering documents, which means regular investors, not just monolines, could start lining up to sue as well. And the monoline exposure alone is plenty sizable – MBIA and its peers insure $34.9 billion of defaulted or seriously delinquent Bank of America “legacy” loans, according to the company’s third quarter Securities and Exchange Commission filings.
More concerning is that the case fits neatly into a pattern of wild over-optimism on mortgage litigation. It’s not just that banks have lowballed the dollar cost of closing out their exposure – they’ve also overestimated the strength of their defenses.
Remember the “hand to hand” combat that Bank of America’s Brian Moynihan vowed would force unfeasible “loan by loan” litigation? Courts have so far reacted positively to plaintiffs’ requests to use statistical sampling. The difficulty plaintiffs would encounter in getting trustees to act? Banks stopped talking about that one after major investors began to band together. The “technical” non-issue of robo-signing?
In the context of that history, the Bransten ruling is particularly worrisome from the point of view of legal risk management. It’s only to be expected that executives will be relentlessly upbeat – that goes with the job. If their lawyers think the same way, however, mortgage litigation will be more of a mess than it already is.
Jeff Horwitz is a risk management editor at American Banker.
Megabank executives don’t make for great legal forecasters. But that hasn’t stopped them from trying.
Just a few months ago, industry chiefs asserted that plaintiffs in mortgage backed securities litigation needed to prove that their losses weren’t a result of a macroeconomic catastrophe -- namely, the housing collapse. Demonstrating that would be “pretty tough,” JPMorgan Chase & Co.’s Jamie Dimon told bank analysts. Over the past year, many of his peers have made the same argument.
Unfortunately for the industry, it now appears that a key group of plaintiffs won’t need to prove that underwriting flaws, rather than broader economic forces, were the central cause of their losses.
In a Tuesday New York Supreme Court ruling, Judge Eileen Bransten found that a monoline insurer, MBIA Inc., must demonstrate only that Countrywide Financial Corp., now a part of Bank of America, tricked it into insuring loans it otherwise wouldn’t have touched.
“This corresponds to a standard claim for fraud, in which fraud is complete when a misrepresentation is made that induces a party to take action and that party suffers damages as a result,” the judge wrote in an opinion expected to shape other monoline suits.
The ruling could have been worse for the big banks. Because Bransten based it on insurance contracts rather than bond offering documents, the decision isn’t ideal ammunition for the broader field of private mortgage securities litigation.
But it’s still pretty bad for B of A and its brethren. Bransten didn’t rule out the possibility that MBIA could win a case based on the offering documents, which means regular investors, not just monolines, could start lining up to sue as well. And the monoline exposure alone is plenty sizable – MBIA and its peers insure $34.9 billion of defaulted or seriously delinquent Bank of America “legacy” loans, according to the company’s third quarter Securities and Exchange Commission filings.
More concerning is that the case fits neatly into a pattern of wild over-optimism on mortgage litigation. It’s not just that banks have lowballed the dollar cost of closing out their exposure – they’ve also overestimated the strength of their defenses.
Remember the “hand to hand” combat that Bank of America’s Brian Moynihan vowed would force unfeasible “loan by loan” litigation? http://www.americanbanker.com/issues/175_240/bofa-mort-security-investors-1029992-1.html Courts have so far reacted positively to plaintiffs’ requests to use statistical sampling. The difficulty plaintiffs would encounter in getting trustees to act? http://www.americanbanker.com/issues/176_17/claims-against-bofa-piling-up-1031844-1.html Banks stopped talking about that one after major investors began to band together. The “technical” non-issue of robo-signing? http://www.americanbanker.com/issues/175_208/wells-owns-up-to-robo-signing-1027812-1.html
In the context of that history, the Bransten ruling is particularly worrisome from the point of view of legal risk management. It’s only to be expected that executives will be relentlessly upbeat – that goes with the job. If their lawyers think the same way, however, mortgage litigation will be more of a mess than it already is.
