Common Threads in Mortgage-Backed Securities Cases

• Posted on: Apr 10 2018

Commercial litigation involving mortgage-backed securities (MBS) cases can be complex and labor-intensive. Attorneys handling MBS cases often must follow intricate and multiple transactions involving many players, including securities issuers, securities underwriters, loan originators, credit-rating agencies, due-diligence service providers, and insurers. Litigators must review the numerous factors and issues in each of the MBS disputes to determine liability and damages. Below are some of the common issues that we see arising in many of the MBS cases.

What are Mortgage-Backed Securities?

It helps to understand how mortgage-backed securities (MBS) are created and how they relate to real estate. MBS are bonds that are secured by real estate loans. RMBS (residential mortgage-backed securities) were a popular type of bond issued before the financial crisis in 2008. To create an MBS, a lender pools a number of loans together that have similar characteristics. That pool is then sold to a securities firm, a federal government agency, or a government-sponsored enterprise to be used as collateral for an MBS.

Investors in an MBS benefit from the cash flow generated from the pooled mortgages. As mortgage holders pay their mortgage payments, investors receive payments, usually monthly payments, of interest and principal.

Many industry experts viewed these securitizations as a factor in the financial crisis of 2008 as these securities failed to generate money when people stopped paying their mortgages. Therefore, this led to a sizeable number of lawsuits regarding various issues related to mortgage-backed securities.

What Issues are Being Raised in MBS Cases?

One of the common allegations in these cases is that the banks holding mortgages submitted documentation for an MBS that contained false or misleading information.  In some cases, it is alleged that the banks omitted key information from the documents about the mortgages within the pool.

For instance, a bank would not include accurate information about its underwriting process, including how it valued property used as collateral for mortgages and determined if borrowers were actually qualified to borrow the sums being loaned to them. When a bank’s underwriting process is faulty, it can create a pool of mortgages that do not have the quality required to secure the MBS properly. These MBS cases often contain allegations of negligent misrepresentation, fraud, and unjust enrichment.

Another issue in MBS cases is statute of limitations problems. Many defendants are arguing that the statute of limitations for bringing these actions have expired. Once a statute of limitations expires, the plaintiff is barred by law from pursuing the defendant for that cause of action. If the court rules in favor of defendants asserting statute of limitations problems, the plaintiffs who lost billions of dollars may not be able to hold credit-reporting agencies, banks, and mortgage lenders liable for misrepresenting the quality of pooled mortgages. Many of the MBS plaintiffs have been able to overcome this issue, but defense attorneys continue to argue statute of limitations as a defense in MBS cases.

Another common allegation in MBS cases is that investment banks knew problems were developing in the MBS markets. However, the banks were more interested in the profits being generated by mortgage securities. Therefore, many banks began to ignore or failed to conduct due diligence. These banks failed to disclose these problems and risks to potential investors as they marketed MBS as investment opportunities. Instead, the banks profited on mortgages they knew were likely to fail.

MBS Litigation Continues

Many MBS lawsuits have settled without going to trial; however, MBS litigation continues as investors seek to recover money they lost by investing in mortgage-backed securities. Schedule a consult with the experienced commercial litigators at Freiberger Haber LLP today to discuss your legal options.