A federal judge ruled Monday that Nomura Holdings (NMR) misled Fannie Mae and Freddie Mac made false representations about the quality of mortgages that were used to back $2 billion securities it sold to the GSEs.
According to court records, U.S. District Judge Denise Cote found Nomura liable when he ruled for the Federal Housing Finance Agency, which acts as conservator for the GSEs, after overseeing the non-jury trial.
"The offering documents did not correctly describe the mortgage loans," the judge said in his lengthy, 361-page decision. "The magnitude of falsity, conservatively measured, is enormous."
The FHA has taken two of the world’s biggest banks to trial in an attempt to recoup more than $1 billion over the $2 billion in mortgage bonds sold to Fannie and Freddie.
The FHFA is also suing the Royal Bank of Scotland (RBS), which served as the underwriter, for selling the mortgages into the secondary markets. Nomura and RBS were the first to stand up to the FHFA; several other banks have settled.
The trial is the first to come from some 18 lawsuits by FHFA back in 2011. The Federal regulator wants to recover some losses on some $200 billion in mortgage bonds the GSEs bought.
The FHFA is suing various big financial firms for the alleged misselling of toxic mortgages to Fannie Mae and Freddie Mac during the housing boom. The FHFA says the mortgages defaulted in large numbers, requiring default on the Fannie and Freddie bonds and led the bailout and conservatorship of the government-sponsored entities.
The FHFA said in its filing that 68% of a sample of the loans were not underwritten in accordance with underwriting guidelines and that appraised values were inflated on average by 11.1%.
Nomura and RBS denied the FHFA’s allegations.
“FHFA is pleased with the Court's decision and we are reviewing the various elements of this important ruling,” said FHFA General Counsel Alfred Pollard. “It is clear the Court found that the facts presented by FHFA were convincing. FHFA looks forward to submitting proposed damages calculated under the formulae applied in the Court's Opinion.”
If Nomura and RBS are ordered to pay damages, they would in turn receive the mortgage bonds, which are valued at just under $500 million.
In the last few months, some of the country’s biggest banks have settled with the federal government over toxic residential mortgage-backed securities, including Bank of America, which settled with the Department of Justice for $16.65 billion, JPMorgan Chase, which settled for $13 billion, and Citigroup, which settled for $7 billion.