Overview
In an opinion dated Friday, Judge Cote granted partial summary judgment to the FHFA (the conservator for the two Government-Sponsored Enterprises, or “GSEs,” Fannie Mae and Freddie Mac), dismissing various banks’ affirmative defense that the GSEs had knowledge that the mortgage securities at issue were defective. The essence of her ruling was that, while the GSEs may have had generalized knowledge of problems with mortgage origination, there was no evidence that they had specific knowledge that the representations at issue were false:
Fatal to most of Defendants’ knowledge theories is the simple fact that, whatever the GSEs’ knowledge of an Originator’s general practices, the Offering Documents contained specific representations about particular sets of Mortgage Loans. These were Mortgage Loans that the Defendants had purchased and chosen to populate the Supporting Loan Groups for a Certificate. The Defendants’ study and selection of that set allowed them to describe the quality of these loans in detail. The level of detail included the percentage of loans in a Supporting Loan Group with an original LTV ratio of 80% or lower and the percentage with an original CLTV ratio of 80% or lower. For instance, Nomura represented in the NHELI 2007-3 Offering Documents that 58.49% of the loans (and 59.31% of the pool by aggregate remaining principal balance) had an original LTV ratio of 80% or lower, and that 18.88% of the loans (and 27.05% of the pool by remaining balance) had an original CLTV ratio of 80% or lower. Thus, whatever the GSEs’ knowledge of general practices or trends, neither of them had access to the files or data that would give them knowledge that those detailed representations about the Mortgage Loans in a Supporting Loan Group were false. As described below, the Defendants have identified no evidence -- either direct or circumstantial -- of the extremely improbable scenario they posit: the GSEs, when investing billions of dollars in Securities, knew of the falsity of Defendants’ specific representations about the Mortgage Loans in the Supporting Loan Groups underlying the Certificates at issue. . . . [A] contradiction lies at the heart of Defendants’ current litigation position. Because Defendants have found no evidence suggesting that the GSEs actually knew their representations were false, they effectively argue that poor origination practices and the declining performance of subprime and Alt-A RMBS should have made it obvious that each of the pertinent representations in the Offering Documents for the Defendants’ 65 Securitizations was false. At the same time, however, Defendants continue to contend that each of these representations was true, and that their due diligence defense will shield them, in part, from liability from any inaccuracy that may have crept into the Offering Documents. Although Defendants are perfectly entitled to plead and argue in the alternative, their positions here are inconsistent. It bears emphasis that at this late stage -- long after the close of fact discovery and as the parties prepare their Pretrial Orders for three of these four cases -- Defendants continue to argue both that their representations were true and that underwriting defects, inflated appraisals and borrower fraud were so endemic as to render their representations obviously false to the GSEs.
