Court Ruling Gives Insight Into Banks’ Conduct During Mortgage Crisis
The Federal Housing Finance Agency recently won a big victory against two banks in the fall out of mortgage crisis. Nomura Holdings of Japan and Royal Bank of Scotland were found to have misled Fannie Mae and Freddie Mac in selling mortgage bonds that contained countless errors and misrepresentations. Judge Denise L. Cote of the Federal District Court in Manhattan held that “the magnitude of the falsity, conservatively measured, is enormous”.
Nomura and RBS were the only two of 18 lenders that took their cases to trial. The others, including Citibank, Bank of America, Wells Fargo, JPMorgan Chase and Goldman Sachs, settled paying collectively almost $18 million in penalties but without their conduct being open to public review.
Judge Cote’s ruling is a 361 page decision and is highly critical of the defendants’ conduct. Of course, the description of the conduct is limited to these two banks and the facts before the court. Unfortunately, it is not too far-fetched to extrapolate that this behavior was common practice during the housing bubble. Loans were poorly underwritten or not underwritten at all and when packaged and securitized, the securitization documents contained numerous errors and misrepresentations.