Nomura, RBS Blame Housing Crash for Fall of Mortgage Bonds

Nomura Holdings Inc. and Royal Bank of Scotland Group Plc blamed the 2007 U.S. housing crash for losses at U.S. government-owned lenders Fannie Mae and Freddie Mac as the banks began their defense against claims they misrepresented about $2 billion of mortgage-backed securities.

Nomura is the first bank to go to trial against the Federal Housing Finance Agency, which sued 18 financial institutions on behalf of Fannie Mae and Freddie Mac over losses on mortgage-backed securities they bought before the 2008 financial crisis.

David Tulchin quoted Freddie Mac’s words in arguing that his client, Tokyo-based Nomura, properly disclosed the risks involved in the securities.

“Failing to predict the timing and magnitude of a historically unprecedented drop in housing prices and the recent financial crisis is not fraud,” Tulchin said in his opening argument Monday, quoting from court papers Freddie Mac filed in 2011 in a case in which it was a defendant.

“We agree with that,” Tulchin told U.S. District Judge Denise Cote, who is hearing the case without a jury. “It’s not only not fraud, it’s not a misrepresentation.’

The FHFA settled with 16 of the banks which agreed to pay a total of $17.9 billion. It seeks more than $1 billion in damages from Nomura and RBS. If Nomura and RBS prevail at the trial, the win might embolden other firms facing mortgage-related suits to defend themselves rather than settle.

Experts Unreliable

Tulchin called evidence the FHFA plans to present through expert witnesses ‘‘wildly unreliable.”

“The plaintiff has only experts, not anyone who has actually operated in the real world,” Tulchin said.

Thomas Rice, representing RBS, told Cote that Fannie Mae and Freddie Mac were “the largest, most sophisticated players in the market,” and can’t claim they were tricked into buying toxic debt.

A lawyer for the FHFA earlier claimed the banks helped fuel the bubble that led to the collapse of the U.S. housing market.

“Nomura and RBS were very willing participants in creating the worst financial crisis in the U.S. since the Great Depression,” Philippe Z. Selendy, a lawyer representing the agency, said in his opening statement.

The FHFA sued Nomura over securities issued from 2005 to 2007, claiming it misled Fannie Mae and Freddie Mac about the quality of loans backing the bonds. Nomura sold securities with faulty appraisals, misrepresentations of home values and borrowers’ finances and misleading statements about underwriting criteria, the agency claims.

RBS underwrote three of the seven securitizations at issue in the trial and was co-underwriter of a fourth.

Expert Witness

After opening statements, the FHFA called Peter Rubinstein, an expert witness who testified about the process of securitizing home loans and marketing mortgage-backed securities.

John Kilpatrick, the appraisal expert, testified after Nomura argued unsuccessfully to block his testimony.

Because there is no jury, the government and banks are submitting written testimony from their witnesses, who are then questioned in court by the other side. The trial is expected to take a month.

The case is Federal Housing Finance Agency v. Nomura Holding America Inc., 11-cv-06201, U.S. District Court, Southern District of New York, (Manhattan).

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