One would think that, as we approach 2021, litigation related to residential mortgage loans originated and sold well over a decade ago would be ancient history. Nevertheless, some suits filed years ago remain active, and, even more surprisingly (and disturbingly), new lawsuits related to loans sold prior to 2008 may be on the way. Here is a look at the current RMBS (residential mortgage-backed securities)-related litigation landscape.

Lehman Brothers Holdings Inc. (LBHI) lawsuits: LBHI has in the last few years resolved more than 100 contractual indemnification/breach of representation and warranty cases that it filed in the United States Bankruptcy Court for the Southern District of New York. We represented many of the companies that reached settlements. But approximately 25 to 30 cases are ongoing (in some of which we are counsel for the defendants), and LBHI is still pursuing pre-litigation demands against some brokers and smaller companies. The path to trial in any cases that might go that far is still a lengthy one. With depositions not yet underway in the filed lawsuits, it is reasonable to expect that any trials would not occur until relatively late in 2022 or beyond.

Threatened lawsuits by Chase/EMC: We represented two companies that recently resolved lawsuits filed against them by EMC. Those are, to date, the only cases filed by EMC in which it sought indemnification related to RMBS settlements that it reached years ago with trustees and monoline insurers. Chase and EMC are, however, threatening a significant number of other mortgage companies and banks with similar types of claims. There is thus a real likelihood that new lawsuits will be filed.

Subpoenas issued by FDIC as Receiver for WAMU: We are aware of recent subpoenas sent to residential mortgage originators/sellers by the FDIC in its capacity as Receiver for Washington Mutual (WAMU). The subpoenas generally seek documents pertaining to the originators’ contracts with WAMU and Long Beach Mortgage Company and communications related to any such contracts or agreements. Perhaps more important is what spurred the issuance of these subpoenas. WAMU entered into a settlement in 2017 in which it committed to pay approximately $3 billion to end claims against it related to alleged loan defects. Deutsche Bank, as trustee for the RMBS trusts, brought the claims against WAMU. The FDIC is now investigating whether it can obtain recoveries against lenders who conveyed some of the loans to WAMU. The subpoenas are part of that investigative effort.

Credit Suisse Securities/DLJ Mortgage Capital: These entities recently went to trial in a case brought against them by MBIA in state court in New York. The case involved allegations of breached representations and warranties in connection with a securitization transaction that originally included 15,615 closed-end second lien residential loans. All but approximately 2000 of those loans were originated by financial institutions other than Credit Suisse/DLJ. After a two-week bench trial, the court issued an order that will pave the way for final assessments of damages. Some observers believe that the court’s factual findings will lead to a final damages tally of in excess of $680 million. The question will then become whether the defendants believe they can still seek the remedy of indemnification from entities that sold them the alleged breaching loans that were the subjects of the lawsuit.

To the extent that there is any good news here, it is that originators generally have far better potential legal and factual defenses to these types of claims than the aggregators (and sometimes even the originators themselves) initially believe. Those defenses can and should be brought to bear fully in the remaining active lawsuits of this type and any new ones that may be filed.