Securities and Financial Sector Legal Review

MBS Updates: Investors’ Suit Tossed; Countrywide’s Repurchase Documents Discoverable

Posted in Mortgage-Backed Securities

Today, we bring you two updates from the mortgage-backed securities litigation universe. First, on March 28, 2012, Justice Barbara R. Kapnick dismissed the complaint of investor group, Walnut Place (which Law360 calls “a legal moniker for distressed debt-focused hedge fund The Baupost Group LLC”) against various Countrywide entities and Bank of America.  Walnut Place brought the Complaint in February 2011, amending it  in April 2011 (see the Amended Complaint here).  Walnut Place alleges that Countrywide breached representations and warranties set forth in two Pooling and Servicing Agreements (PSAs), and the investors suffered damages as a result of Countrywide’s failure to repurchase the breaching loans.  Walnut Place named trustee Bank of New York Mellon as a “nominal defendant,” claiming that the trustee “unreasonably failed to sue the defendants and enforce their obligations to repurchase the loans.”

Justice Kapnick found that a “no-action clause” in the PSAs barred Walnut Place’s suit. The clause required an Event of Default by the Master Servicer, which Walnut Place did not allege. The court distinguished situations where no-action clauses were not enforced because the trustee’s misconduct was at issue, which was not the case here.  Judge Kapnick also rejected the contention that the trustee was “unreasonable” in refusing to sue, citing the fact that upon Walnut Place’s communication, the trustee “asked for additional time to investigate the matter.” The court also found that the $8.5 million settlement involving Countrywide MBS showed that the trustee “did, in fact, act upon plaintiffs’ complaints.”  (We’ve reported extensively about the settlement, see our posts here, here, here and here). Thus, the action was premature.

For additional reporting, see Mortgage Suit Vs Bank of America, BNY Mellon Is Dismissed and Bank of America’s Countrywide Wins Walnut Place Dismissal.

Second,  in a blow for Countrywide, on March 27, 2012, the First Department upheld two discovery rulings by Justice Bransten in the MBIA v. Countrywide case.  First, the court upheld Justice Bransten’s January 28, 2011 denial of Countrywide’s motion to compel “documents concerning [MBIA's] remediation efforts,” finding that “Plaintiff met its burden of establishing that the documents concerning its remediation efforts were primarily prepared in anticipation of litigation, and are, thus, privileged.” The documents in question related to MBIA’s analysis of loans it insured and its decision-making concerning which loans it would ask Countrywide to repurchase.  MBIA did this analysis through counsel and consultants, a fact which the court highlighted, finding that “[MBIA] submitted evidence, including retainer agreements, showing that its counsel retained consultants to help provide legal advice to [MBIA] with respect to potential legal claims against defendants.” Thus, the material was attorney-client privileged, and the court found with little analysis that the fact that MBIA referred to its repurchase review in the complaint did not constitute a waiver.

The First Department also upheld Justice Bransten’s July 1, 2011 order compelling Countrywide to produce documents concerning its review of MBIA’s requests that it repurchase loans.  The court distinguished this holding from its ruling on the remediation efforts, finding that “Plaintiff proved that its repurchase analysis was not a part of its ordinary business. By contrast, the record shows that processing repurchase requests was an inherent and long-standing part of defendants’ business,” because “defendants were, and always had been, contractually obligated to conduct repurchase reviews and such reviews were, and always had been, conducted by defendants’ own staff of underwriters and auditors.”

Finally, to give some context to the rulings  coming down on the side of monoline insurers, the New York Times published an interesting article on March 8, 2012, An Industry’s Failure to Verify, After Trusting, that considered  MBIA in a different light. Floyd Norris of the Times and Herald Tribune wrote,

Many of the securitizations being fought over now were composed entirely of mortgages that appeared risky on their faces. That is why the investors wanted insurance.

In one securitization for which MBIA is suing Credit Suisse, the vast majority of loans went to borrowers whose income, or assets, or both, had not been verified. About 15 percent of the loans had been made by New Century Mortgage, which by the time MBIA issued its insurance had already gone bankrupt because of its shoddy lending practices.

It would be nice to hear someone — whether the regulators or MBIA — say that in retrospect they were far too trusting and bear some responsibility for what happened.

Don’t hold your breath waiting for that to happen.