Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc.

• Decision Date: 11 February 2015
• Docket Number: No. 11cv6201 DLC.,11cv6201 DLC.
• Citation: 74 F.Supp.3d 639
• Parties: FEDERAL HOUSING FINANCE AGENCY, Plaintiff, v. NOMURA HOLDING AMERICA, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

74 F.Supp.3d 639

FEDERAL HOUSING FINANCE AGENCY, Plaintiff

v.NOMURA HOLDING AMERICA, INC., et al., Defendants.

No. 11cv6201 DLC.

United States District Court, S.D. New York.

Signed Feb. 11, 2015.

Philippe Z. Selendy, Manisha M. Sheth, Deborah K. Brown, Tyler G. Whitmer, Jeffrey C. Miller, Zachary Williams, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for plaintiff Federal Housing Finance Agency.

David B. Tulchin, Steven L. Holley, Bruce E. Clark, Bradley A. Harsch, Katherine J. Stoller, Sullivan & Cromwell LLP, New York, NY, Amanda F. Davidoff, Elizabeth A. Cassady, Sullivan & Cromwell LLP, Washington, DC, for defendants Nomura Holding America, Inc., Nomura Asset Acceptance Corp., Nomura Home Equity Loan, Inc., Nomura Credit & Capital, Inc., Nomura Securities International, Inc., David Findlay, John McCarthy, John P. Graham, Nathan Gorin, and N. Dante LaRocca.

Thomas C. Rice, David J. Woll, Andrew T. Frankel, Alan Turner, Craig S. Waldman, Simpson Thacher & Bartlett LLP, New York, NY, for defendant RBS Securities Inc.

OPINION & ORDER

DENISE COTE, District Judge:

This Opinion addresses cross motions to exclude expert testimony and a related motion in limine. Defendants¹ have moved to exclude trial testimony of plaintiff Federal Housing Finance Agency's (“FHFA”) expert witness Robert W. Hunter (“Hunter”) to the extent that it is based on information that was not available “at the origination” of the loans underlying the seven certificates (“Certificates”) at issue here. The defendants have also moved in limine to exclude Hunter's testimony that some of the originators of the loans (“Originators”) failed to adhere to their own underwriting guidelines when issuing the loans. FHFA has moved to exclude the trial testimony of defendants' expert witness Michael Forester (“Forester”) that is offered to rebut Hunter's opinions since he does not consider information that became available after the origination of the loans.

Through these motions, the parties essentially dispute three issues. They contest (1) whether the Originators' guidelines may serve as the basis for FHFA's claims in this action, (2) what evidence FHFA may use to show that the offering documents for the Certificates (“Offering Documents”) contained false statements, including false statements about the underwriting process, and (3) the relevant period of time for testing the accuracy of any representation in the Offering Documents. As explained below, in making representations about compliance at origination with underwriting guidelines, the Offering Documents are referring to the Originators' guidelines, and FHFA may rely on any relevant evidence, including evidence not available to either the Originators or the defendants at the time of the securitization, to prove that these representations or any other representations in the Offering Documents were false. FHFA must demonstrate in some instances that representations were false as of the date the loan was originated, and in others that they were false as of the “Cut–Off Date”² for the relevant Offering Document.

BACKGROUND

FHFA, acting as conservator for Fannie Mae and Freddie Mac (together, the “Government Sponsored Enterprises” or “GSEs”), filed suit on September 2, 2011 against defendants alleging that the Offering Documents used to sell the GSEs seven Certificates associated with residential mortgage-backed securities (“RMBS” or “Securitizations”)³ contained material misstatements or omissions. RMBS are securities entitling the holder to income payments from pools of residential mortgage loans (“Supporting Loan Groups” or “SLGs”) held by a trust.

FHFA brought these claims pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “Securities Act”), as well as Virginia's and the District of Columbia's Blue Sky laws. This lawsuit is the sole remaining action in a series of similar, coordinated actions litigated in this district by FHFA against banks and related individuals and entities to recover losses experienced by the GSEs from their purchases of RMBS. A description of the litigation and the types of misrepresentations at issue in each of these coordinated actions, including the instant case, can be found in FHFA v. Nomura Holding Am., Inc., 60 F.Supp.3d 479, 484–88, 498–99, 11cv6201 (DLC), 2014 WL 6462239, at *3–6, *16–17 (S.D.N.Y. Nov. 18, 2014) (“Nomura ”), as well as FHFA v. UBS Americas, Inc., 858 F.Supp.2d 306, 323–33 (S.D.N.Y.2012), aff'd, 712 F.3d 136 (2d Cir.2013) (“UBS ” ).

The alleged misstatements in the Prospectus Supplements at issue in this case include representations about underwriting standards and certain characteristics of the mortgage loans, specifically data concerning owner occupancy⁴ and loan-to-value (“LTV”)⁵ ratios. Each of these representations in the Supplements is described below.

A. Loans “Were Originated” Generally in Accordance with Guidelines.

The Prospectus Supplements contained representations that the loans within the RMBS “were originated generally” in compliance with their applicable underwriting guidelines. For example, the Prospectus Supplement for NAA 2005–AR6 states that “[t]he Mortgage Loans ... were originated generally in accordance with the underwriting criteria described in this section.”⁶ Those Originators contributing more than 10% of the mortgage loans in an RMBS are identified by name, along with the percentage of the mortgage loans that they contributed. For example, the Supplement for NAA 2005–AR6 identifies Alliance Bancorp, Silver State Mortgage and Aegis Mortgage as the Originators of approximately 21%, 12%, and 11%, respectively, of the loans within the Securitization by aggregate principal balance as of the Cut–Off Date for the Prospectus Supplement.

The sections of each Prospectus Supplement addressed to underwriting describe both the process by which a borrower applies for a mortgage loan and the process through which the application is reviewed and approved. For example, the Prospectus Supplement for NAA 2005–AR6 describes the information the borrower must supply to the loan's Originator as follows:

Generally, each borrower will have been required to complete an application designed to provide to the original lender pertinent credit information concerning the borrower. As part of the description of the borrower's financial condition, the borrower generally will have furnished certain information with respect to its assets, liabilities, income ..., credit history, employment history and personal information, and furnished an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy.

Having received an application with the pertinent data and authorizations, the Originator proceeds to review the application. This analysis includes a determination that the borrower's income will be sufficient to carry the increased debt from the mortgage loan. The Prospectus Supplement for NAA 2005–AR6 explains in pertinent part:

Based on the data provided in the application and certain verifications (if required), a determination is made by the original lender that the borrower's monthly income (if required to be stated) will be sufficient to enable the borrower to meet their monthly obligations on the mortgage loan and other expenses related to the property such as property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. Generally, scheduled payments on a mortgage loan during the first year of its term plus taxes and insurance and all scheduled payments on obligations that extend beyond ten months equal no more than a specified percentage not in excess of 60% of the prospective borrower's gross income.

The section of the Supplements addressed to the underwriting process used by loan Originators also explains the process used to ensure that there is security for the issued loans, for instance by requiring some borrowers to obtain mortgage insurance or because an appraisal has shown that the mortgaged property itself provides adequate security. For instance, the Supplement for NAA 2005–AR6 states:

The adequacy of the Mortgaged Property as security for repayment of the related Mortgage Loan will generally have been determined by an appraisal in accordance with pre-established appraisal procedure standards for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice [“USPAP”] adopted by the Appraisal Standards Board of the Appraisal Foundation....

Six of seven of the Supplements also note that the underwriting standards for the loans were less stringent than those applied by the GSEs. For instance, the Supplement for NAA 2005–AR6 explains that the underwriting standards applicable to the loans

typically differ from, and are, with respect to a substantial number of Mortgage Loans, generally less stringent than, the underwriting standards established by Fannie Mae or Freddie Mac primarily with respect to original principal balances, loan-to-value rations, borrower income, credit score, required documentation, interest rates, borrower occupancy of the mortgaged property, and/or property types.⁷

Six of the seven Prospectus Supplements represented that all loans in the RMBS “were originated generally” as just described.⁸ In addition, if specific Originators contributed more than 20% of the loans in any RMBS, the Prospectus Supplements also described in considerable detail the underwriting guidelines of those Originators. For example, the Prospectus Supplement for NHELI 2006–HE3 devoted approximately seven pages to a description of the guidelines used at People's Choice Home Loan, Inc., which had contributed 38.19% of loans to the Securitization by aggregate principal balance as of the Cut–Off Date.

B. Collateral Tables

Each Prospectus Supplement also contains sets of tables with statistics (“Collateral Tables”) that disclose the ...