JPMorgan, Bank of America Corp. and Citigroup Inc. (C) were among the lenders sued last year for allegedly misleading Fannie Mae and Freddie Mac about the soundness of loans underlying billions of dollars of residential mortgage-backed securities. JPMorgan served as the lead underwriter for 30 out of the 103 securitizations at issue in this case.
U.S. District Judge Denise Cote in Manhattan today rejected a bid to throw out the FHFA’s complaint, overruling arguments that the agency lacked factual support that the loans underlying the securitizations weren’t underwritten in accordance with the guidelines set out in the offering documents.
“The agency’s reliance on this information is not, as the defendants allege, an effort to argue ‘fraud by hindsight’; rather the amended complaint suggests that these market events are telltale signs of defects that were present in the securitizations all along, albeit, unbeknownst to the public,” the judge wrote.
“FHFA may be wrong of course; a jury will decide,” Cote said. “But the claim is not an implausible one.”
Cote said that the plaintiffs’ amended complaints includes allegations of a “total collapse in credit ratings” and claims the banks had made false statements of material facts in registration statements, which “directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages.” The plaintiffs also claim the loans underlying the securities experienced defaults and delinquencies at a much higher rate than they would have if the loan originators had adhered to underwriting guidelines.
Cote cited evidence provided by the plaintiffs in the amended complaint that included statements or two “confidential witnesses” who were personally involved in the origination and underwriting of JPMorgan’s EMC unit.
She also said the plaintiffs included testimony from witnesses who described being pressured by supervisors to approve loans in disregard of their expressed concerns about potentially fraudulent documentation and cited other evidence provided by plaintiffs involving Washington Mutual Inc.
“As one appraiser who did business with WaMu during the relevant period described the bank’s origination practices: ‘It was the Wild West ... if you were alive, they would give you a loan, Actually, I think if you were dead, they would still give you a loan,’” Cote said in her ruling, citing the witness’s statements.
WaMu, based in Seattle, filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. for $1.9 billion.
The defendants argued the plaintiffs had failed to provide sufficient evidence to support their claims.
Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.
Cote did narrow the case, dismissing some claims alleging violations of the Virginia Securities Act as well as fraud claims regarding the owner-occupancy and loan-to-value ratio of the securities for which New York-based JPMorgan served as lead underwriter.
She cited the amended complaint filed by the plaintiffs, including statements made by JPMorgan Chief Executive Officer Jamie Dimon criticizing the quality of loans originated by Chase Home Finance LLC, a unit of the bank. The judge said the amended complaint also mentioned the $5.3 billion settlement JPMorgan reached this year with state and local authorities.
Joe Evangelisti, a spokesman for JPMorgan, declined to comment on the ruling.
Also sued by the FHFA were Barclays Plc (BARC), Nomura Holdings Inc. (8604), HSBC Holdings Plc (HSBA), Societe Generale SA (GLE), Morgan Stanley (MS), Ally Financial Inc. (ALLY), Royal Bank of Scotland Group Plc, Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK) and First Horizon National Corp. (FHN)
The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-CV-6188, U.S. District court, Southern District of New York (Manhattan).
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