Law firm says banks should re-test reps and warranties risk
A law firm representing Bank of America ($13.51 0.08%) in a major mortgage-backed securities case says banks should reevaluate their risk exposures when it comes to litigation involving alleged breaches of representations and warranties made in mortgage bond contracts.
The O'Melveny & Myers law firm, which represents BofA in a major reps and warranties case filed by bond insurer MBIA, says originators with this type of risk exposure should also re-calibrate their loss reserves since putback risks are much more in play with this new federal court decision out of New York.
In a note posted on its website, O'Melveny & Myers said a recent Southern District of New York court decision creates a legal standard in the jurisdiction that could put banks at greater risk of being held accountable for misrepresentations made on securitized mortgage loans.
The case involves claims made by insurer Syncora against EMC Mortgage Corp. Syncora guaranteed the underlying principal and interest payments on mortgages originated by EMC.
Syncora later demanded that EMC Mortgage Corp. buy back various loans due to alleged misrepresentations made about the quality of the mortgages and violations of the reps and warranties clause.
EMC argued that the alleged breaches were not the cause of the underlying defaults, but attorneys with O'Melveny say the Southern District court set a new standard that improved Syncora's position, along with the position of other firms, that filed lawsuits over reps and warranties breaches.
The court held that an "originator that securitized those mortgages into mortgage-backed securities could be liable for alleged breaches of representations and warranties it made, to the insurance company" even if the breaches were not the cause of the underlying default, O'Melveny & Myers explained in its note.
Attorneys with O'Melveny believe the New York court's decision could have serious implications for mortgage originators.
"Such suits can be brought by various parties, including, among others, an investor who purchased the MBS, the insurance company that insured the underlying mortgages and/or principal and interest payments on the MBS, the guarantor of the MBS, the servicer of the underlying mortgages, and the trustee of the mortgage pool," the law firm wrote in its analysis report.
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