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Nomura paying $480 million in settlement over pre-crisis mortgage bonds

Accused of misleading RMBS investors, including Fannie Mae and Freddie Mac

Nomura Holding America and several of its affiliates will pay $480 million in a settlement with the Department of Justice over the companies’ mortgage bond activities in the run-up to the financial crisis.

The DOJ claimed that Nomura misled investors, which included university endowments, retirement funds, federally insured financial institutions, Fannie Mae, and Freddie Mac, about the quality of the underlying loans between 2006 and 2007.

The settlement stems from allegations that Nomura “knowingly securitized defective mortgage loans” in its residential mortgage-backed securities and misled investors about the quality and characteristics of those loans.

According to the DOJ, Nomura’s investors suffered “significant” losses as a result of Nomura’s alleged misconduct.

The DOJ details the allegations against Nomura, many of which are similar to all of the other sizable RMBS settlements of the last years: securitizing loans they knew were toxic, lying about their due diligence process, and repeatedly looking the other way when underwriting standards became looser and looser.

In Nomura’s case, the company claimed its due diligence process was “extensive,” “disciplined,” and “carefully developed,” and that the company only worked with “hand-picked industry leading” due diligence vendors. The company claimed that as a result of its “superior” standards and due diligence processes, “Nomura’s loan performance should surpass industry standards.”

But according to the DOJ, none of that was true.

The DOJ claims that Nomura knew that the loans that were in its RMBS deals did not comply with applicable underwriting standards or were based on inflated and potentially fraudulent appraisals.

In one case, a loan originator openly described the loans in Nomura’s mortgage bonds as “dogsh*t,” but that didn’t stop Nomura from securitizing the loans and allegedly lying to investors about the quality of those loans.

One member of Nomura’s due diligence group allegedly said: “There is no such thing as a bad loan . . . just a bad price.”

Nomura also allegedly knew that a “significant” number of the loans it securitized had even not gone through Nomura’s supposedly stringent due diligence process, and that its process was compromised. 

When discussing potential changes to its loan buying program, Nomura’s head of RMBS due diligence allegedly said that the company was “turning into the lemming of the mortgage business,” “following the herd” and compromising its standards to match what other companies were doing just to keep the gravy train rolling.

Nomura also allegedly failed to deal with the weaknesses in its own process and kept doing business with originators that its own due diligence team called “extremely dysfunctional,” with “systemic” underwriting issues and “questionable” origination practices.

Eventually, Nomura began securitizing loans that its due diligence personnel previously described as “sheer lunacy.”

And according to the DOJ, all of this was done knowingly and at the explicit direction of senior Nomura personnel, who made a “conscious decision” to compete for market share in the highly competitive pre-crisis RMBS market.

“This settlement holds Nomura accountable for its fraudulent conduct in connection with its Residential Mortgage-Backed Securities offerings, which caused substantial harm to investors and contributed to the financial crisis of 2008,” said Richard Donoghue, United States Attorney for the Eastern District of New York.

Nomura, for its part, does not admit any facts, liability or wrongdoing in connection with the settlement and disputes the allegations made by the DOJ, but the company is choosing to settle.

“The company and the U.S. subsidiaries consider it to be in their best interests to conclude this matter and avoid protracted and expensive litigation concerning transactions and practices that occurred ten or more years ago,” Nomura said in a statement.

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