As summer approaches and the weather turns warmer, RMBS litigation is also heating up, generating long-awaited precedent that will dictate how mortgage losses are likely to be allocated by the courts. In order to keep my readers apprised on what to watch for over the next three months in the key mortgage derivative lawsuits, I am launching a series called the Top 5 RMBS Cases to Watch this Summer. Starting today, and continuing over the next week, I will be analyzing the latest developments in one bellwether case per day in the world of RMBS litigation. I will conclude the series with an article on possible end game scenarios, so that we can begin to understand how the subprime crisis will finally shake out, and what it will mean for the future of mortgage finance. So, without further ado, I present case number 5 in the Top 5 RMBS Cases to Watch this Summer.
Case No. 5 – Syncora v. EMC
Though patience is ordinarily a virtue, it’s a prerequisite in the world of residential mortgage backed securities (RMBS) litigation. That’s because progress in complex litigation always takes longer than anyone expects.
Take the lawsuit by bond insurer Syncora against mortgage lender EMC Mortgage (formerly a subsidiary of Bear Stearns that’s now wholly owned by JP Morgan Chase) as a prime example. On December 19, 2011, Syncora v. EMC, Case No. 09-cv-3106 (S.D.N.Y. 2009) became the focus of significant attention when Reuters blogger Alison Frankel wrote that a partial summary judgment decision on the issue of loss causation was “imminent” and anticipated that we’d have a ruling in the case “before the end of this week.” Sitting here nearly six months later, we are still awaiting that decision.
Of course, this isn’t Ms. Frankel’s fault – she provides some of the best and most timely coverage of RMBS litigation in the business. Ms. Frankel was relying on statements made by His Honor himself, when Judge Paul Crotty announced at a hearing on October 12, 2011 that, “I think it would be in everybody’s interest to get a decision [on summary judgment] before we break for the holidays. That’s what I’ll try to do.” (October 12 Transcript at 24:22-24) Apparently, progress takes longer in complex litigation than even judges expect.
The good news is that we can finally see the light at the end of the tunnel. A hearing on the summary judgment motion has been set for this Wednesday, June 13, 2012. With the motion fully briefed and oral argument complete, Judge Crotty certainly should be able to hand down a decision by the end of the summer. In fact, given the delay we’ve already seen and the importance of this decision to the case and the broader litigation landscape, I would expect the decision to come down by mid-July – but don’t hold me to it. Judges work on their own schedules, and the demands of their dockets may force things to the back burner for far longer than we (or they) would like.
Whenever the decision comes down, there’s good reason to believe that Syncora’s patience will be rewarded. Judging by Crotty’s previous decision on summary judgment, which I analyzed here, Hizzoner is none too pleased with EMC’s interpretation of its contractual responsibilities or conduct thus far in living up to those responsibilities. Having previously declined to limit Syncora’s relief to the put-back remedy (which he famously described as being designed for “onesies and twosies”) and having authorized Syncora to use statistical sampling to prove its claims, I anticipate that Crotty will be similarly disinclined to limit Syncora’s access to the put-back remedy by adopting a narrow definition of materiality.
I’ve discussed at length how important the definition of materiality/loss causation will be to the ease of proof in put-back litigation. No single issue would cause a bigger swing in the pendulum of losses from investors to banks than a ruling that put-backs do not require a showing that the identified breach of reps and warranties actually caused the loan to go into default.
Since Judge Eileen Bransten punted on that issue in her partial summary judgment ruling in another major monoline suit – MBIA v. Countrywide – Crotty could be the first to rule definitively on whether this is a viable defense. If he goes the way I expect he will (and the way he should, given the strength of the arguments on each side) and rules that a breach must merely have a material impact on the riskiness of the loan rather than actually cause the borrower to stop making payments, it will provide clarity on the scope of repurchase liabilities and facilitate significantly larger recoveries for the monolines and RMBS investors. It would also undermine the assumptions made by Bank of New York Mellon in settling Countrywide put-back claims for pennies on the dollar (tune in later this week to see if BNYM’s Article 77 proceeding makes the Top 5 list).
On the other hand, Crotty could also decide to punt on the issue, forcing litigants and commentators to put Guns N’ Roses’ classic track on repeat and dig deep for what’s left of our “Patience.” Either way, this ruling is certainly one to watch for in the months to come.