Judge Rakoff Delivers Big Blow to Bank of America and JP Morgan in Flagstar Ruling
Judge Rakoff Delivers Big Blow to Bank of America and JP Morgan in Flagstar Ruling
Yves Smith
Naked Capitalism
Wednesday, February 6, 2013
Wow, one of my big assumptions about mortgage putback cases has been turned on its ear, much to the detriment of Bank of America and JP Morgan. If you thought there were pitched legal battles on this front, a key ruling by Judge Jed Rakoff means you ain’t seen nothing yet.
If you are late to this brawl, putback cases are also called representation and warranty cases, or rep and warranty. They occur when investors and bond guarantors who relied on the promises made by the originators and sponsors about the quality of the loans argue that the sellers broke those promises (“representations and warranties”). Their remedy is typically that they put dodgy loans back to the sponsor, and they either replace with a loan that was up to snuff or cash…
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… On an admittedly small case, in dollar amount, Rakoff awarded bond insurer Assured $90.1 million of the $116 million it sought in damages against Flagstar over two home equity line of credit securitizations. That’s nearly 78%. Trust me, no big bank is reserving anything within hailing distance of those sort of numbers for bond insurer putback cases...
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...And this ruling is even worse for the big banks…
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Judge Rakoff came out with his long awaited opinion in the Assured Guaranty vs. Flagstar Bank case. This was a straight rep and warranty case – no fraud allegations. In short, Assured, the bond insurer on two Flagstar deals, got nearly everything they wanted, including legal fees. Assured was demanding $116 million for claims paid, Rakoff awarded them $90 million, plus legal fees. That is a remarkably high success rate – way higher, I suspect, than most people had been expecting from the bond insurer cases.
Rakoff allowed statistically sampling and believed that the insurer didn’t need to prove causation. He didn’t even believe the insurer needed to collect only on defaulted loans (he obligated Flagstar to also buy back loans which were breaches, but on which Assured hadn’t paid claims yet).
I think this will probably have implications for the litigation reserves that banks are holding on other bond insurer cases (especially BofA) and for the big BofA and Rescap rep and warranty proposed settlements. The banks have been fighting hard on the insurer cases and refusing to settle – I think that’s about to change. I wouldn’t want to be a holder of BofA stock right now. This is the first rep and warrant case to go to trial and it was a big, big win for the plaintiffs.
RULING HERE:
http://www.nakedcapitalism.com/2013/02/judge-rakoff-delivers-big-blow-to-bank-of-america-and-jp-morgan-in-flagstar-ruling.html#OX3qDfhSlLJl7Uyp.99
http://www.dailykos.com/story/2013/02/06/1184999/-Closely-Watched-Court-Decision-Breaks-Bad-for-Wall-St-Has-A-Day-of-Reckoning-Arrived
