A federal district court judge says Flagstar Bancorp will have to pay a total of $106 million to Assured Guaranty for failing to ‘repurchase or cure’ defective mortgages in two RMBS securitizations that Assured guaranteed for the Michigan-based bank.
But when adding in interest and new claims that have surfaced since then, the total pay-out figure comes to $106 million, and that’s not counting the potential for another $8 million to $15 million in attorney’s fees, which will be considered after the resolution of any appeals.
Judge Jed Rakoff with the U.S. Southern District of New York made the decision to up the total amount due in the case this week, making the Assured Guaranty v. Flagstar case another precedential holding for investors and insurers suing banks over RMBS-related losses.
Jacob Buchdahl, a partner with Susman Godfrey and lead counsel for Assured Guaranty, says another recent decision from a New York Appellate Division court suggests defendants in RMBS buyback cases are losing ground in court.
According to Reuters, the appellate division in New York mirrored a previous ruling from the Assured Guaranty v. Flagstar case, with the judge holding that a plaintiff does not have to show a breach of a rep and warranty actually caused a particular loan to default.
Instead, Buchdahl said both courts have now ruled that all you have to show is the breach “materially impacted the investors' interest.”
In other words, linking an actual loan default to the contractual breach is not necessary as long as the alleged misrepresentations were made. Buchdahl added that the loan doesn’t even have to default as long as the investor's interest was impacted in some way.
"It substantially reduces the issues that Flagstar can appeal on, I just don’t think there are a lot of avenues left," Buchdahl said.
With other RMBS cases still pending, the attorney believes the industry will start to see more settlements because the "tide tends to be turning on issuers of RMBS loans that have defaulted," he explained.
For Buchdahl, one of the more significant developments coming out of the Assured Guaranty decision is the court allowing the bond insurer to prove its case against Flagstar without having to examine specific loans and their final performance.
"We were able to prove the case and establish damages based on a sample of loans," he said. Out of 10,000 loans involved in the Flagstar case, Assured's side was presented using a sample of just 400 loans from each securitization trust.
This repurchase sample theory allowed the case to proceed without the plaintiffs having to examine each loan, making the burden of proof look much easier for any RMBS cases that may decide to follow.