Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc.
| Decision Date | 29 January 2015 |
| Docket Number | 11cv6201 (DLC) |
| Parties | FEDERAL HOUSING FINANCE AGENCY, Plaintiff, v. NOMURA HOLDING AMERICA, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
For plaintiff Federal Housing Finance Agency:
Philippe Z. Selendy
Manisha M. Sheth
Deborah K. Brown
Jeffrey C. Miller
Zach Williams
QUINN EMANUEL URQUHART & SULLIVAN, LLP
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:
David B. Tulchin
Steven L. Holley
Bruce E. Clark
Bradley A. Harsch
Katherine J. Stoller
SULLIVAN & CROMWELL LLP
125 Broad St.
New York, NY 10004
Amanda F. Davidoff
Elizabeth A. Cassady
SULLIVAN & CROMWELL LLP
1700 New York Avenue NW, Suite 700
Washington, DC 20006
For defendant RBS Securities Inc.:
Thomas C. Rice
David J. Woll
Andrew T. Frankel
Alan Turner
Craig S. Waldman
SIMPSON THACHER & BARTLETT LLP
425 Lexington Ave.
New York, NY 10017
The defendants1 have moved to exclude some of the expert testimony which plaintiff Federal Housing Finance Agency ("FHFA") intends to present through Robert W. Hunter ("Hunter"). FHFA seeks to offer Hunter's testimony on several topics, including the extent to which mortgage loans underlying seven certificates ("Certificates") sold to Fannie Mae and Freddie Mac (together, the "Government Sponsored Enterprises" or "GSEs") were underwritten in compliance with the underwriting guidelines of the loans' originators ("Originators") or the criteria described in the offering documents for the Certificates ("Offering Documents"). In this motion, the defendants specifically complain that Hunter has created and then reliedupon what he describes as the minimum industry underwriting standards ("Minimum Standards") in rendering his opinion, instead of relying exclusively upon the Originators' guidelines.2 For the following reasons, the motion to exclude is denied. Nonetheless, while Hunter may rely at trial on the Minimum Standards, he may only do so where his testimony is sufficiently linked by FHFA to the representations regarding underwriting in the Offering Documents.
FHFA, acting as conservator for the GSEs, filed suit on September 2, 2011 against the defendants, alleging that the Offering Documents used to market and sell the seven Certificates to the GSEs contained material misstatements or omissions. The Certificates were associated with residential mortgage-backed securities ("RMBS" or "Securitizations"). RMBS are securities entitling the holder to income payments frompools 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., --- F. Supp. 3d ---, 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) (DLC), aff'd, 712 F.3d 136 (2d Cir. 2013) ("UBS").
Defendants move to exclude testimony by Hunter that refers to or relies upon Minimum Standards, as described in his report of May 15, 2014 ("Report"). The Report explains that Hunter re-underwrote 723 of the 796 loans that form the sample upon which FHFA is litigating its claims in this lawsuit.3 From this re-underwriting, Hunter concluded that "a majority" of the sample loans were not originally underwritten in accordance with the underwriting guidelines of the Originators. The percentage of loans with underwriting defects and substantially increased credit risk varied among the seven SLGs, from a low of 50% to a high of 84%. The percentage for the sample taken as a whole was 69%.
The Amended Complaint in this action asserts, inter alia, that defendants' Prospectus Supplements "contained material misstatements and omissions regarding compliance with underwriting guidelines." Among other things, it asserts that Originators "systematically disregarded their respective underwriting guidelines," and that the Supplements contained "material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans."
As an example of representations concerning underwriting that were made in the Prospectus Supplements for the Certificates, the Prospectus Supplement for Nomura Securitization 2005-AR6 explained that the "Mortgage Loans have been purchased by the seller from various banks . . . and other mortgage loan originators and purchasers of mortgage loans in the secondary market, and were originated generally in accordance with the underwriting criteria described in this section." That section of the Supplement, which ran for two anda half pages, covered a number of issues. Among other things, it explained that the underwriting standards for the loans "typically differ from, and are, . . . generally less stringent than, the underwriting standards established by Fannie Mae or Freddie Mac." It added that, generally, borrowers had to provide the original lender with "pertinent credit information", and gave many examples of such information. The Supplement also described in some detail the next step in the origination process. It began that description by stating that "[b]ased 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 . . . ." The Supplement also explained the requirement that mortgage insurance policies be obtained if the loan-to-value ("LTV") ratio at origination exceeded 80%, and the role of appraisals in underwriting. It represented that all appraisals conformed to the Uniform Standards of Professional Appraisal Practice or USPAP. Tables in the Supplement listed aggregate characteristics of the loans within an SLG, including the LTV ratio, owner-occupancy percentage, and weighted average credit score.
In most instances in the re-underwriting process, Hunter and his team compared the documentation in a loan file to theunderwriting guidelines of the loan's Originator. There were three situations, however, in which Hunter relied on his identified set of Minimum Standards to conduct the re-underwriting.
In the case of 24 loans, Hunter had "no applicable guidelines."4 In re-underwriting these loans, he relied upon the Minimum Standards. He concluded that 15 of the 24 loans had substantially increased credit risk based on the failure to comply with the Minimum Standards.
Hunter relied on the Minimum Standards as well when the available guidelines from an Originator had an effective date more than 90 days earlier than the loan's origination date. When that was the case, Hunter used both the Originator's guidelines and the Minimum Standards.
Hunter also used the Minimum Standards in the re-underwriting process when the available underwriting guidelines from the Originator were, in Hunter's view, "silent regarding key credit characteristics" or characteristics that he considers "common and essential."
The use of the Minimum Standards affected, according to FHFA, the re-underwriting of 187 loans out of 723.5 They were not used for 536 of the sample loans.6
Hunter identifies fifty-nine characteristics as composing the minimum requirements across the industry for underwriting residential mortgage loans during the period of 2002 through 2007. In identifying these characteristics, he relied upon his experience, consultation with other experts, a review of materials, and a comparison with the guidelines used by four originators who had substantial origination practices and who were "known to have had very lenient origination requirements" during the period.
The defendants move to exclude Hunter's testimony about the Minimum Standards pursuant to Federal Rule of Evidence 702 and Daubert v. Merrill Dow Pharms., Inc., 509 U.S. 579 (1993), on the grounds that none of the Offering Documents made representations about compliance with minimum industry standards; that Hunter's methodology for developing the MinimumStandards was too unreliable and flawed; and that at least some of his Standards could not have been the "minimum" of any industry standards. The applicable rules of law pertaining to exclusion of expert testimony under Federal Rule of Evidence 702 and Daubert are set out in this Court's Opinion of January 28, 2015 regarding defendants' motion to exclude the testimony of FHFA's expert Dr. John A. Kilpatrick, and that discussion is incorporated by reference here. See FHFA v. Nomura Holding Am., Inc., 11cv6201 (DLC), 2015 WL ----- (S.D.N.Y. Jan. 28, 2015).
The defendants argue that it is an Originator's failure to comply with underwriting guidelines, as those guidelines are described in the Offering Documents, and not their failure to comply with any Minimum Standard identified by Hunter, that must form the basis for any finding of a misrepresentation regarding compliance with underwriting guidelines in this action. They are correct.
None of the seven Prospectus Supplements at issue here represents that the loans in the SLGs for the Certificates were underwritten in...
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