Credit Crisis Litigation Update: Significant Settlement Activity in 2014 and New Cases against RMBS Trustees and Mortgage Lenders

Thu Feb 19 12:53:40 EST 2015
By Dr. Faten Sabry, Sungi Lee, Joseph Mani, and Linh Nguyen

The year 2014 witnessed a significant increase in large settlements in residential mortgage-backed securities (“RMBS”) litigation as well as an increase in new cases against RMBS trustees and mortgage lenders. Since the start of the credit crisis and through 2014, we have recorded $72 billion in settlements for credit crisis-related litigation, including three significant settlements with the U.S. Department of Justice (“DOJ”). The DOJ agreed to three settlements in 2013 and 2014 for a total of $37 billion. In addition, there was a total of $35 billion in non-DOJ settlements from 2007 to 2014, with $14 billion recorded in 2014 alone. The $35 billion in settlements covered state and federal credit crisis-related lawsuits.

Lawsuits against RMBS trustees increased in 2014 with 31% of new claims being filed against RMBS trustees. In earlier years, filings against the RMBS trustees were less than 2% of total filings. In addition, filings against mortgage lenders increased dramatically at the end of 2013, such that 45% of the cases filed in 2013 were brought against mortgage lenders. In 2014, 33% of cases filed were brought against mortgage lenders. From 2007 through 2012, lawsuits against mortgage lenders accounted for only 8% of filings.

In addition, the paper analyzed a subset of the credit crisis-related settlements for which we have public data as a function of the original principal balance as well as the lifetime payments on wrapped certificates. Intex was used to model expected future payments on wrapped certificates by projecting cash flows from the loan collateral. The settlement ratios presented in this article are meant to demonstrate the relative difference in the magnitude of settlements in RMBS cases at different litigation stages and involving a variety of allegations. The estimates would reflect the outcome of negotiations between parties, are for illustrative purposes only, and are applicable to a limited set of cases for which we have public data.

This new paper -- by Senior Vice President Dr. Faten Sabry, Consultant Sungi Lee, Senior Analyst Joseph Mani, and Research Associate Linh Nguyen -- presents an overview of settlements and filing activities including different types of settlements and filings, the nature of the defendants and plaintiffs in the litigation, and the financial products involved in credit crisis lawsuits.

This is the 11th installment of the NERA Insights series of articles dedicated to the analysis of the credit crisis. The others are available on the right-hand side of this page.