New York's highest court may have shut the door to many future lawsuits over flawed mortgage bonds, ruling investors have six years from the day the deal closed to pursue remedies.
The Court of Appeals in Albany Thursday upheld the dismissal of a 2012 suit by investors seeking to force a Deutsche Bank AG unit to buy back more than $330 million of bad mortgages that were packaged into bonds before the financial crisis.
The ruling had been eagerly awaited by the industry and could stop investors seeking to recoup mortgage-bond losses from filing new lawsuits. The bank won a dismissal in 2013 when the state's appellate division threw out the mortgage-bond investors' suit, citing the time limit. Thursday's decision affirmed that ruling.
The ruling increases the likelihood new mortgage-backed securities will be issued as it clarifies that claims for violations of representations and warranties about underlying loans are subject to a six-year "sunset," Nomura Securities analysts Paul Nikodem, Pratik Gupta and Shawn Lim said in a note to investors.
The ruling also raises the possibility of settlements on individual deals already in litigation, along with agreements to extend the time that investors have to sue, the Nomura analysts said.
"Most of the banks now have a limited and defined set of mortgage repurchase liabilities and may look to settle as they look to resolve their legacy mortgage liability," the analysts said.
The Deutsche Bank unit's obligation to cure or buy back loans that didn’t conform with statements about their quality was the only remedy for investors, who didn't pursue those options and are therefore blocked from suing by the state's six-year statute of limitations, the Court of Appeals said.
Such statements "concern the characteristics of their subject as of the date they are made," and Deutsche Bank's refusal to buy back the allegedly defective loans didn't allow the investors to sue, the court ruled. The investors also didn't give Deutsche Bank enough time to fix the quality of the defective loans or to buy them back, the court said.
It makes sense that Deutsche Bank wouldn't guarantee future performance of the loans as sponsor and seller, the court said.
"A sponsor does not guarantee payment for the life of the transaction because loans may default 10 or 20 years after they have been issued for reasons entirely unrelated to the sponsor's representations and warranties," the court said.
Deutsche Bank is pleased with the court's decision, Amanda Williams, a spokeswoman for the company, said in an email. Paul Clement, an attorney representing the investors, didn't immediately respond to an email and a voice-mail message seeking comment on the ruling.
