NEW YORK—A federal judge has ruled that two banks misled both Fannie Mae and Freddie Mac in selling mortgage bonds full of errors and misrepresentations in the lead-up to the 2008 mortgage market collapse and financial crisis.
Judge Denise L. Cote of the Federal District Court in Manhattan, in a strongly worded 361-page decision, said the “magnitude of falsity, conservatively measured, is enormous.” The ruling was handed down in a case brought by the U.S. government against Nomura Holdings and the Royal Bank of Scotland. The banks were the only two of 18 banks against which the U.S. had brought cases that opted not to settle. The other banks have paid nearly $18-billion in settlements, but in settling did not need to go through any probes or reveal internal documents.
Judge Denise Cote
Nomura Holdings and Royal Bank of Scotland had argued that it was the housing crash, and not any deceptive loan documents, that led to the collapse of mortgage-backed bonds.
While the Justice Department and other government agencies were involved in the other settlements, it was the Federal Housing Finance Agency, which was created in 2008 to oversee the then struggling Fannie Mae and Freddie Mac, that won the suit against Nomura Holdings and Royal Bank of Scotland. Both banks were active in subprime mortgage lending during the housing boom.
In the case, which was not argued before a jury, Judge Cote has asked the FHFA to submit a proposal for damages, which analysts expect to be in the range of $500 million.
In her ruling, Cote said that loan guidelines were “systematically disregarded” and that there were “disturbing examples” of the banks selling faulty loans.
“This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the offering documents for the securities they sold that were backed by those mortgages?,” Cote wrote, concluding the banks had not.
It is not known whether the banks will appeal, but it is expected they could argue that the actual losses taken were much smaller than the paper losses shown, and again, that the their actions did not cause the housing crisis.
In her opinion, Cote wrote, “The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses,” she wrote, “but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”