RMBS Settlements Not Dead Yet

It is now more than seven years since the housing crisis hit, and settlements over claims of selling toxic residential mortgage-backed securities are still alive and well.

Earlier this month, Goldman Sachs settled for $5.1 billion with U.S. Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration (NCUA), and the Federal Home Loan Banks of Chicago and Seattle. The Federal Housing Finance Agency (FHFA) has a lawsuit pending against Royal Bank of Scotland over sales of toxic RMBS to Fannie Mae and Freddie Mac which some analysts expect will reach a settlement this year in the multibillions.

The latest RMBS settlement occurred in Virginia when the Commonwealth’s attorney general, Mark R. Herring, announced that 11 financial institutions have agreed to collectively pay more than $63 million to resolve claims that the banks misrepresented the quality of certain RMBS they sold to the Virginia Retirement System (VRS). The case is a landmark one for the Commonwealth of Virginia—it is the largest non-healthcare-related recovery ever obtained in a suit alleging violations of the Virginia Fraud Against Taxpayers Act.

“This case breaks new ground for Virginia, recovering millions for Virginia taxpayers from banks that we alleged had misrepresented the products they sold to the Commonwealth,” Herring said. “Today's settlement, which represents significant relief to VRS, taxpayers and pensioners of the Commonwealth, is one of the largest of its kind in the nation.”

The attorney general alleges that the misrepresentation of the quality of the RMBS sold by the 11 financial institutions to the VRS harmed not only the VRS but the taxpayers and pensioners of the Commonwealth. As part of the settlement, the defendants admitted no liability, and the claims were dismissed with prejudice.

One of the 11 institutions was Royal Bank of Scotland, which agreed to pay $10 million to the Commonwealth of Virginia as part of the settlement. Last year, RBS was a defendant in the FHFA’s lawsuit against Nomura in which Nomura was found liable for deceiving the GSEs in the sale of $2 billion worth of mortgage-backed securities. Nomura was ordered to pay $839 million.

In June 2014, RBS agreed to pay $99.5 million to settle a separate FHFA suit claiming that the bank sold more than $2 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac between 2005 and 2007. Several large financial institutions have settled with the U.S. Justice Department and state regulatory agencies to resolve claims of mortgage-backed securities fraud: Citigroup for $7 billion in July 2014, JPMorgan Chase for a then-record $13 billion in November 2013, and Bank of America for a record $16.65 billion in August 2014.

Below is a breakdown of the 11 institutions to settle with VRS and the Commonwealth of Virginia and the amount each agreed to pay as part of the settlement:

• Countrywide Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith, Inc. (combined): $19.5 million in total
• RBS Securities Inc.: $10 million
• Barclays Capital Inc.: $9 million
• Morgan Stanley & Co. LLC: $6.9 million
• Deutsche Bank Securities Inc.: $5.6 million
• Citigroup Global Markets Inc.: $4.75 million
• Goldman, Sachs & Co.: $2.9 million
• HSBC Securities (USA) Inc.: $2.5 million
• Credit Suisse Securities (USA) LLC: $1.2 million
• UBS Securities LLC: $850,000