"Sometimes you're the windshield. Sometimes you're the bug."--Mark Knopfler
One of the most financially significant consequences of the mortgage meltdown is the proliferation of lawsuits seeking compensation for failed residential mortgage-backed securities (RMBS) investments. Many of these cases involve alleged misrepresentations of an originator/seller's representations and warranties regarding loan quality.
Two recent decisions by the New York courts may bring to a screeching halt suits and in-process repurchase demands involving pre-2009 loan vintages.
First, a little background.
One of the threshold questions in any lawsuit is: Was the suit filed before the applicable statute of limitations (SOL) expired? If the answer is no, the action must be dismissed.
Many of the RMBS issuers during the boom reside, for legal purposes, in New York state. As a consequence, many mortgage loan purchase (or sale) agreements (MLPAs) are governed by the laws of that state.
Under New York contract law, the SOL is generally six years. Because statutes of limitation begin to run when the cause of action accrues, a related issue is determining when the harm occurred.
Many of the securitization suits filed so far--often on the last day before the SOL expires--measure the harm from the date an originator/seller refused to cure or repurchase an allegedly defective loan. Because it can take years before a loan that goes into default gets put back to the originator/seller, many of these suits involving loans originated as far back as 2005 weren't filed until 2012 or 2013.
In December 2013, the New York Court of Appeals (equivalent to the Supreme Court in other states) took on the question of when, for purposes of measuring the SOL, an alleged breach of representations and warranties occurs. In ACE Securities Inc. u. DB Structured Products Inc. (2013), the plaintiffs sued for misrepresentations allegedly made during the securitization of a pool of mortgage loans. The MLPA, which contained the reps and warranties, closed on March 28, 2006.
Both the MLPA and the Pooling and Servicing Agreement prevented the trustees from filing suit or demanding a repurchase until they 1) discovered or were notified of a breach of the reps and warranties, and 2) the 60- to 90-day cure period had lapsed. The defendants were notified of an alleged breach on Feb. 28, 2012, and the suit was filed in the lower court on March 28, 2012--the last day before the statutory limitations period...