Defective Mortgage Loans Cost Nomura and RBS US$806 million

As the US District Judge, Denise Cote pronounced, “The magnitude of falsity, conservatively measured, is enormous”, the Nomura Holdings Inc and Royal Bank of Scotland Group Plc were ordered to jointly pay US$806m to Fannie Mae and Freddie Mac, for sale of defective residential mortgage-backed securities. Cote ruled, “The offering documents did not correctly describe the mortgage loans”.

The judgement was entered after finding the banks liable on Monday, in a lawsuit filed by the Federal Housing Finance Agency (FHFA), which has acted as conservator for Fannie and Freddie since their 2008 government takeover. Following a non-jury trial, the court ruled against Nomura, which sponsored US$2 billion of securities sold to Fannie and Freddie, and also against RBS for underwriting four of the deals.

Under the order, Fannie Mae will receive US$26.6 million while Freddie Mac will be paid US$779.4 million by the two firms. The amount paid in damages is in line with an estimate given by a lawyer for the FHFA. Also, the banks will get back the mortgage bonds for which the FHFA sued, estimated worth US$434 million to US$479 million as of March 26.

Nomura informed that it will file an appeal, stating that it takes this situation very seriously and strongly disagrees with the outcome of the case. It said that the ruling is expected to have an insignificant impact on the company’s consolidated performance.

The FHFA has obtained nearly US$17.9 billion in settlements from institutions like Bank of America Corp, JPMorgan Chase & Co and Deutsche Bank AG. This lawsuit is the first to reach trial, out of the 18 filed by the FHFA in 2011, amounting to US$200 billion of damage inflicted on the government-sponsored enterprises, Fannie Mae and Freddie Mac from defective mortgage loan sales.

The case is Federal Housing Finance Agency v Nomura Holding America Inc, US District Court, Southern District of New York, No. 11-06201.