- Quicken Loans Inc. argues that its suit against the federal government is valid because it is more than just a fraud case. It claims that it is about broader issues with government housing programs.
- A class action suit against JPMorgan Chase Bank NA will not be dismissed over failure to file timely mortgage satisfactions even though one of the plaintiffs rejected a settlement offer for more than she could get from a court judgment.
- An administrative judge denied that the SEC had shown fraud in commercial mortgage-backed securities suit against Standard & Poor’s former executive, Barbara Duka, because the SEC failed to show that S&P had done anything wrong, let alone Duka.
- IKB Deutsche Industriebank AG’s suit against Goldman Sachs Group Inc. remains intact for losses after a $73.2 million purchase of residential mortgage-backed securities. Goldman Sachs argued that the suit was beyond the German 3-year statute of limitations.
- Law360 compiles lists of “The Top Banking Cases In The First Half of 2015.”
Tag Archives: Standard & Poor
A HELOC of a Securitization
S&P posted A Look At U.S. Second-Lien And HELOC Transactions Post-Crisis. In 2008, they announced that “would halt rating new U.S. RMBS closed-end second-lien transactions because loan performance had deteriorated significantly. [They] haven’t rated any U.S. RMBS second-lien (both second-lien HCLTV [high-combined loan-to-value] and closed-end second-lien) or HELOC [home equity line of credit] transactions since 2007.” (1) They also note that notwithstanding the fact that such securitizations had ended, “HELOC loans continue to be originated, with banks generally keeping these types of loans on their books.” (1)
The report provides a some interesting data on those securitizations. Let me share one highlight, a table of lifetime loss projections of RMBS with different collateral types. For the 2007/2008 vintage, they performed as follows.
Second-lien HCLTV: 45%
Closed-end second lien: 58%
HELOC: 42%
Subprime: 49%
Alt-A: 29.25%
Negative Amortization: 43.25%
Prime: 10%
With a bit of understatement, they conclude that “[c]losed-end second-lien transactions may be limited going forward because of limited investor and issuer appetite, given past performance and uneven home price appreciation.” (5) They note that HELOCs are not included in the definition of Qualified Mortgages or Qualified Residential Mortgages [QRM] “so the issuer would most likely have to retain a stake in the deal, increasing issuance costs.” (6)
This seems like a good a good result, if you ask me. Here is a product that performed miserably (with losses of greater than 40%!!!) as a securitization. If the new QRM rules reduce these securitization but banks continue to originate them for their own portfolio, perhaps Dodd-Frank is doing its job in the mortgage markets. Of course, we want to ensure that there is sufficient sustainable credit for HELOCs, but it is good to see that portfolio lenders are stepping in where they see a market that RMBS issuers has exited.
Standard & Poor Puffery
The Department of Justice filed its opposition to S&P’s Motion to Dismiss the federal government’s FIRREA lawsuit. At this stage of the litigation, it appears as if the key issue is whether S&P’s alleged misrepresentations about its business practices are actionable false statements or are mere “puffery” as S&P’s lawyers describe them in their brief (passim). Let’s put aside the fact that describing your professional standards, principles and guidelines as “puffery” seems like a very bad long-term strategy (imagine the line of questioning at a Congressional hearing about S&P’s role as a Nationally Recognized Statistical Rating Organization).
But putting that cringer aside, S&P does raise a legitimate legal issue which relies heavily on Boca Raton Firefighters and Police Pension Fund v. Bahash, 12-1776-cv (2d Cir. Dec. 20, 2012). In that case, the Court of Appeals for the Second Circuit affirmed the trial court’s dismissal of the plaintiffs-investors’ claims because S&P’s statements regarding the “integrity and credibility and the objectivity of” its ratings were “the type of mere ‘puffery’ that we have previously held to be not actionable.” (6)
DoJ responds that “S&P rests its “’puffery’ defense primarily on [Boca] an unpublished, out-of-circuit opinion addressing securities fraud claims by S&P shareholders.” (opposition brief at 7). These are not substantive critiques of the Boca opinion, of course, so the 9th Circuit could well find the reasoning compelling.
But DoJ further argues that “the focus of the action here is the effect of S&P’s statements not on S&P shareholders [as in Boca], but on investors in the RMBS and CDOs S&P rated. This is a crucial difference.” (Id.)
Will Judge Carter agree?
