Opinion

Alison Frankel

Mortgage investor group enters fray over time bar on MBS put-backs

By Alison Frankel
August 6, 2013

Remember the great statute of limitations schism that occurred in New York State Supreme Court in May? On the very same day, two state court judges issued drastically different decisions on when the statute begins to run in cases asserting that sponsors of mortgage-backed securities breached representations and warranties on the underlying loans. Justice Shirley Kornreich sided with investors in a put-back case against DB Structured Products, holding that the clock starts ticking when an MBS securitizer refuses a demand to repurchase defective loans in the mortgage pools. Justice Peter Sherwood, on the other hand, explicitly rejected that interpretation of the statute of limitations, ruling instead in a put-back case against Nomura that the statute is triggered when the MBS offering closes.

Given that so many mortgage-backed trusts are governed by New York state law – and that so many investors have only recently managed to amass sufficient voting rights to assert put-back claims – this divide over the statute of limitations has multibillion-dollar consequences. If Sherwood’s view ends up prevailing when New York appellate courts consider the issue, banks will knock out a swath of suits filed in 2012 and 2013 asserting contract breaches in MBS issued in 2006 and 2007. But if Kornreich is correct, MBS investors can continue directing trustees to sue for years to come under New York’s six-year statute for breach of contract claims.

The Association of Mortgage Investors, a trade group for MBS noteholders, considered the statute of limitations issue so significant that it filed an amicus brief in the Nomura case before Sherwood, arguing that the statute begins to run when an issuer refuses to buy back a deficient loan. Obviously, Sherwood didn’t find AMI’s position persuasive. But that hasn’t deterred the trade group. This week a new AMI amicus brief on the statute of limitations hit the docket in Manhattan federal district court, in a Federal Housing Finance Agency put-back case against GreenPoint Mortgage, which originated supposedly defective loans underlying a Lehman MBS trust.

The brief, filed by AMI’s counsel at Holwell Shuster & Goldberg, reiterates the trade group’s position that the statute of limitations for put-backs begins to run when a mortgage originator or issuer refuses to buy back a loan that breaches its reps and warranties. The new filing acknowledges Sherwood’s ruling to the contrary, but only in passing (and on minor points). Its emphasis is instead on specific language in the GreenPoint contracts stating that causes of action accrue when a breach is discovered, a demand is asserted and that demand is refused. GreenPoint itself, according to the AMI brief, has cited that contract language in two cases in which the lender claimed that put-back suit were prematurely filed because all of the contract conditions weren’t met. GreenPoint can’t have it both ways, AMI argues. And industry custom and expectation dictates that loan originators repurchase bad loans regardless of when breaches are asserted.

“If a court applying New York law accepts GreenPoint’s argument that the (contract conditions) should either be ignored or be declared void as a matter of public policy,” the brief said, “this will establish an adverse precedent that may result in an unjustified market-wide windfall to legally obligated parties such as GreenPoint at the expense of RMBS investors such as AMI’s members.”

This is the fourth time, according to an AMI representative, that the trade group has felt compelled to weigh in as an amicus in a put-back case. In addition to the statute of limitations brief it filed in the Nomura case before Justice Sherwood, it appeared in a put-back suit against UBS before U.S. District Judge Harold Baer of Manhattan and a case against Morgan Stanley before New York State Supreme Court Justice Eileen Bransten. Both of those briefs asserted that under industry custom, mortgage investors should not be precluded from bringing claims based on liquidated loans, despite a ruling by a federal judge in Minnesota that held the sole remedy for breaches of reps and warranties is repurchase of the bad loan, so once the loan is extinguished there’s no cause of action.

AMI’s briefs don’t yet seem to have shifted judicial thinking; its argument in the Nomura case certainly didn’t change Justice Sherwood’s mind. Perhaps the GreenPoint case is the trade group’s opportunity to make its mark. That would certainly be a boon to its members.

I left a message with GreenPoint counsel James Murphy of Murphy & McGonigle but didn’t hear back.

(Reporting by Alison Frankel)

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