Every few years, a new and trendy financial product seems to pop up in our debt markets. Think crypto-currency, EB-5 financing, opportunity zones, fin-tech and crowdfunding. Some of these phenomena stick around for the long haul. Others simply fade away as investors lose interest (which they inevitably do when the returns do not materialize or public interest wanes). One of the newer financial products to hit the markets is “sustainable lending.” Also referred to as “green finance”, the most exciting aspect of this product is its ability to simultaneously produce high returns and generate positive social impact. This innovative combination generates staying power not only among investors, but also among the public at large. In this era of social media, when attention spans are infinitesimal and public opinion is extraordinarily fickle, sustainable lending could be a game changer for us all. Continue Reading
From RMBS to SLABS: Is History Repeating Itself?
The fallout from the last financial crisis and recession is far from over. More than a decade after the demise of Lehman and Bear Stearns, among others, litigation continues related to alleged deficiencies in mortgage loans securitized as part of residential mortgage-backed securities (RMBS) offerings. Our firm thus remains extremely busy with, for example, defense of mortgage loan originators and brokers sued for purported breaches of contractual indemnification provisions and representations and warranties — regarding loans sold prior to 2008. Continue Reading
New Second Circuit Statute of Limitations Ruling A Benefit to Loan Originators, Brokers
As originators and brokers of mortgage loans continue to get served with new lawsuits (or threatened with potential suits) related to loans that they conveyed to aggregators prior to the financial crisis of 2008, questions almost inevitably arise as to how this is even possible: aren’t such claims time-barred under the applicable statute of limitations? The answer is more complicated than the originator or broker might have initially thought. It can depend on what state’s law applies under the pertinent contract, for example. For many judges, it can also depend on whether the aggregator plaintiff characterizes its claim as one for “indemnification,” rather than “breach of contract” or “repurchase.” Continue Reading
New York High Court Rules on Statute of Limitations
Over the last several years, we have posted several times about whether the statute of limitations bars remedies against lenders (and sometimes sponsors and trustees) of residential mortgages. (See here, here, and here). One of the most important cases in this area has been ACE Sec. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc.[1]
We had discussed the intermediate appellate court decision in ACE in 2013. In 2015, the New York Court of Appeals affirmed the intermediate court, holding “that a cause of action for breach of representations and warranties contained within a residential mortgage-backed securities contract accrued when the contract was executed because the representations and warranties were breached if at all, on that date.”[2] Continue Reading
Jury, Not Judge, Must Decide Meaning of Representations
Last month, New York’s intermediate appellate court reversed a grant of summary judgment in favor of plaintiff MBIA Ins. Corp.[1] MBIA, an insurer of RMBS trusts and a common plaintiff in this type of litigation, had sued Credit Suisse, the sponsor of the trusts.
The trial court had ruled as a matter of law that a “No Monetary Default” representation and warranty (R&W) encompassed borrower misrepresentation. The trial court also had ruled as a matter of law that the “Mortgage Loan Schedule” R&W guaranteed not just that the Mortgage Loan Schedule (MLS) had accurately transcribed information from the loan file, but also the underlying accuracy of the information in the MLS. Continue Reading
Lehman Brothers Seeks to Expand Lawsuits Against Loan Originators
Last week, Lehman Brothers Holdings Inc. (“LBHI”) filed two new motions in its ongoing Southern District of New York Bankruptcy Court litigation against approximately 130 loan originators and brokers: (1) an Omnibus Motion for Leave to File Third Amended Complaints Pursuant to Rule 7015 of the Federal Rules of Bankruptcy Procedure (“Motion for Leave to Amend Complaint”); and (2) a Motion for Leave to Amend and Extend the Scope of the Alternative Dispute Resolution Procedures Orders for Indemnification Claims of the Debtors against Mortgage Loan Sellers (“ADR Motion”). This firm currently represents more than a dozen of the defendants. Continue Reading
Chase Lets Loose a Barrage of New Indemnification Demand Letters
Ten years after the financial crisis, mortgage companies and regional/local banks are still getting hit with new breach of contract and indemnification claims related to loans sold before the crisis. The latest case in point involves demand letters that JPMorgan Chase is sending out to lenders throughout the country. The letters pertain to loans sold by originators to EMC, Bear Stearns and Chase prior to 2008. Chase then pooled those loans with loans it originated on a retail basis, depositing the pools into residential mortgage-backed securities (RMBS) trusts. Institutional investors and monoline insurers subsequently sued Chase, alleging securities fraud and other causes of action.
Chase ultimately settled with 21 institutional investors for $4 billion. Now it is seeking to recoup from originators sums that it claims to be owed as a result of the settlement payments it agreed to make. The kinds of claims that Chase is making — particularly given that these are “indemnification” claims made in the aftermath of settlement of RMBS-related allegations against Chase, which structured the RMBS transactions, selected the loans for inclusion in each “pool” of loans, and made representations, warranties and other disclosures to investors and insurers about the loans that Chase selected — raise several interesting issues, and potentially strong defenses (legally and factually), for the originators now receiving the demand letters. Originators are thus well advised to carefully and thoroughly evaluate their legal options when they receive these letters. There are a lot of grounds on which to defend against this type of threatened claim.
A Decade on, Crisis-Era Litigation Still Bedevils Banks
Banks and other financial institutions might reasonably have expected that, 10 years after the collapse of Bear Stearns and the demise of Lehman Brothers, they would finally be free and clear of lawsuits spawned by the financial crisis.
That has not come to pass. Nor does freedom from legal actions rooted in the events of that era appear imminent.
This circumstance should be seen not just as an annoyance for banks, or another indication of how slowly our judicial system and claims resolution processes often operate. Instead, it is an opportunity for proactive, potentially curative action. Banks can take steps now that would minimize, or at least expedite resolution of, certain types of legal claims that tend to proliferate in the aftermath of a crisis. Continue Reading
EB-5 Program Extension Allows Developers More Time to Obtain Financing
Last week H.R.1625 – Consolidated Appropriations Act, 2018 was enacted. The Act includes a continuation of funding, until September 30, 2018, for the EB-5 Regional Center Program.
EB-5 financing has been a low cost financing alternative for real estate developers when compared to other capital sources. EB-5 credit facilities are typically structured as staged funding vehicles for pre-vertical costs and expenses. While the projects differ as to concept (eg., high rise, mixed-use, single family, and condo projects), EB-5 financing has played a vital role in allowing our developer clients to move projects forward, while at the same time allowing developers to recoup sizable portions of their initial outlays, including for land acquisition. In two of the transactions we recently handled, the EB-5 financings were extended before a senior mortgage loan facility and other components of the capital stack had been finalized. Continue Reading
Lehman RMBS Settlement Likely to Spur Additional Claims
On March 8, the Bankruptcy Court for the Southern District of New York concluded a lengthy “claims estimation” trial to determine the appropriate final settlement price for a resolution of lawsuits filed on behalf of investors in residential mortgage-backed securities (RMBS) created by Lehman Brothers Holdings prior to its bankruptcy in September 2008. The judge determined that the final settlement value of this particular set of claims was $2.38 billion – down from the $37 billion initially demanded, and the $11.4 billion sought by the plaintiffs in this claims estimation trial. A separate group of plaintiffs that had previously settled with Lehman Brothers Holdings had resolved their claims for approximately $2.4 billion.
The resolution of the claims estimation trial is significant for businesses that sold residential mortgage loans to Lehman, for at least two reasons. First, lawsuits that Lehman filed against more than 100 loan originators and sellers in this same bankruptcy court had essentially been on hold for the last several months while the estimation trial was proceeding. We can reasonably expect that those existing cases, which relate to Lehman’s 2014 settlements of claims against it by Fannie Mae and Freddie Mac, will become more active once again with that trial now completed. Continue Reading
