Rejecting an all-too-common strategy among mortgage investors of “shoot first, talk later,” New York state judge Eileen Bransten has dismissed several mortgage repurchase lawsuits originally filed by the Federal Housing Finance Agency (“FHFA”) against a Credit Suisse affiliate, ruling that the suits were filed before Credit Suisse had an opportunity to repurchase the subject loans or otherwise cure the alleged loan deficiencies.
The FHFA had alleged in the lawsuits that Credit Suisse unit DLJ Mortgage Capital, Inc. made misrepresentations about mortgage-backed securities that cost investors $1.4 billion. In dismissing the claims with prejudice, Judge Bransten found that, while DLJ was entitled to a 90-day cure period to buy back the loans after receiving the plaintiffs’ repurchase demands, the FHFA had filed the summonses before DLJ was served with the repurchase notice.
FHFA Failed to Satisfy a Necessary Condition
The FHFA, in its role as conservator for Freddie Mac – which was a certificate holder in the loan pools – alleged that DLJ misrepresented the quality of more than 2,600 loans, and that DLJ was required to cure or repurchase those loans under the applicable pooling and servicing agreements. The pools at issue include $3.8 billion worth of mortgage loans, with the investors in those pools allegedly having lost $1.4 billion.
Notably, the parties had argued over whether the six-year statute of limitations for the case began to run when investors had a right to make a repurchase demand or when an actual demand was made, the subject of a recent New York Appellate Division ruling holding that the limitations period begins to run when investors first have a right to make a repurchase demand. Judge Bransten said that even if the summonses were timely, they were not properly filed. In short, the court held that the FHFA was not permitted to sue DLJ for “refusing” to repurchase loans, given that the FHFA had never formally requested that the DLJ repurchase those loans.
Ruling Highlights Another Defense Available to Originators
Judge Bransten’s ruling highlights loan originators’ ability to defend themselves against buyback claims on the grounds that the first the originator heard of the alleged loan deficiencies was when the originator was served with the complaint.
The cases, which were dismissed by Judge Bransten with prejudice on January 6, 2014, are Home Equity Asset Trust 2006-5 et al. v. DLJ Mortgage Capital Inc. (652344/2012), Home Equity Asset Trust 2006-6, et al. v. DLJ Mortgage Capital Inc. (652644/2012) and Home Equity Asset Trust 2006-7, et al. v. DLJ Mortgage Capital, Inc. (653467/2012), all in the Supreme Court of the State of New York, County of New York. Note that the FHFA dropped out as a plaintiff in 2012 and was replaced by U.S. Bank National Association, as trustee of the loan pools.