Not All MBS Settlements Are Equal

28 June 2017
By Faten Sabry, Sungi Lee, and Linh Nguyen

In the twelfth installment of NERA’s insight series dedicated to the analysis of the credit crisis, NERA Bankruptcy Chair Dr. Faten Sabry, Consultant Sungi Lee, and Senior Analyst Linh Nguyen present an overview of credit crisis-related settlement activity and trends in litigation-related and non-litigation settlements. Even though most regulatory investigations have been resolved, private litigation continues, and we expect most future settlements to relate to private litigation.

Main findings from the article

  • Credit crisis-related settlements totaled $124.6 billion from 2007 to 2016. The settlements peaked at $44.3 billion in 2014, dropped to $5.5 billion in 2015, and increased again to $24.5 billion in 2016.
  • The $124.6 billion settlement total includes $57.1 billion in litigation-related settlements to resolve claims from more than 300 lawsuits. The litigation-related settlements leveled off at $4.1 billion in 2015 and $4.2 billion in 2016, down from a peak of $20.8 billion in 2014.
  • Of the $57.1 billion in litigation-related settlements, we analyzed 48 MBS settlements and collected data on the original principal balance of over 16,000 securities at issue so that we could compare each settlement to the original balance of the securities covered under the settlement. The settlement ratio varies widely depending on the nature of the litigation and the plaintiffs involved.
  • We find that government agencies and monoline insurers were able to recover at rates that are 10 to 14 times higher, on average, than settlements in securities class actions.
  • On average, settlements with government agencies, including the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), and the National Credit Union Administration (NCUA), represented 12.0% of the original balances of the covered MBS certificates. The average settlement ratio for cases involving monoline insurers was 16.7% while the average settlement ratio in securities class actions was only 1.2%.