One of the more interesting litigation issues emerging from the credit crisis is in the area of loan repurchase agreements. At the height of the real estate bubble, trillions of dollars of residential mortgage loans were sold and securitized based on representations and warranties in loan agreements. As we all know, the bubble burst and now purchasers of these loans are suing sellers to compel them to buy back billions in loans. I just received this fantastic article written by John Doherty of Alston & Bird discussing the “Brave New World of Large-Scale Mortgage Loan Repurchase Litigation.” Here is an excerpt:
Trillions of dollars of residential mortgage loans—the lingua franca of the residential securitization market—have been originated, sold, securitized and insured accompanied by loan-level representations and warranties. As a result of the credit crisis, loan purchasers, monoline insurers and residential mortgage-backed securities investors have been seeking to compel loan sellers to repurchase billions of dollars of residential mortgage loans based on alleged breaches of representations and warranties. While these cases have made for compelling headlines, the reality—from a litigation perspective—is that they are difficult, time-consuming and expensive to prove in court, due to the nature of the collateral, the legal requirements and the sheer volume of loans at issue. There are a number of undeveloped legal issues concerning the interpretation of typical purchase and sale agreement provisions. And, these cases do not easily lend themselves to summary judgment, and thus a loan purchaser could be required to identify and establish in litigation breaches of various representations and warranties across multiple securitizations involving hundreds of thousands of loans.
A key undecided issue is whether loan purchasers will be permitted to use statistical sampling to establish loan-level representation and warranty breaches. In late December 2010, a New York court in MBIA Ins. Corp. v. Countrywide Home Loans, Inc. provided part of the answer and ruled—for the first time—that a plaintiff in a residential mortgage loan put-back case can use statistical sampling to present evidence to prove breach of contract, fraud and damages. While the decision is limited, and significant issues remain unresolved, this is a notable development.
Key Legal Issues in Mortgage Loan Repurchase Litigation
Under a typical purchase and sale agreement, if a loan breached a representation and warranty, and that breach caused a material and adverse effect on the loan’s value, the seller, upon the receipt of prompt notice, is obligated to repurchase the loan. Typically, that is the loan purchaser’s sole remedy against the loan seller for any such breaches.
This sounds simple and straightforward, but it isn’t. The loan purchaser has to establish, among other things:
1. Standing to sue. This becomes an issue when trust rights, securitizations and/or liquidated/foreclosed assets are involved.
2. Breach of a representation and warranty (addressed in the next section).
3. A “material and adverse” effect on the loan’s value. Materiality is generally not defined in the applicable agreements, and it has not been clearly defined in the case law, so there typically are significant disputes over how to assess materiality, and what constitutes a material decline in loan value.
4. Causation. The case law provides little guidance on how courts should determine whether a breach caused a specific decline in loan value, or whether and to what extent the credit crisis—arguably a superseding event—undercuts causation.
5. Prompt notice. A purchaser is often required to provide “prompt” notice of a breach that is linked to the seller’s right to cure. Courts have not prescribed what constitutes “prompt” notice, and what consequences flow from the failure to provide it. Courts have also differed on whether prompt notice is a condition precedent, although a strong majority have held that it is not.
Click here for the complete article from the Alston & Bird publication Trends.
Tags: Alston Bird, credit crisis, John Doherty, loan repurchase agreement, MBIA Ins. Corp. v. Countrywide Home Loans, representations and warranties, residential mortgage loans
[...] burden of proof for any wrongdoing will be on the prosecution, and there are ambiguity regarding key points, including whether litigation must be carried out on at the level of the individual loan or at the [...]