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FHFA, Nomura Trial Over Mortgage-Backed Securities Winding Down

themreport.com | April 11, 2015

The court battle between the Federal Housing Finance Agency (FHFA) and Nomura Holdings is nearing a climax after three weeks, as both sides presented closing arguments on Thursday.

Nomura and the Royal Bank of Scotland, also a defendant in the case, are the first two financial institutions out of 18 sued by the FHFA in 2011 that failed to reach a settlement and took the case to trial. FHFA sued the 18 institutions to recoup U.S. taxpayer costs following the government's $188 billion bailout of Fannie Mae and Freddie Mac in 2008, after which the government seized control of both Enterprises.

FHFA is seeking $1.1 billion in damages. The Agency alleges it suffered monumental losses when the sponsor of the mortgage-backed securities, Tokyo-based Nomura, and the securities' underwriter, Royal Bank of Scotland, did not follow underwriting guidelines on 68 percent of a sample of a bundle of securities backing more than $2 billion worth of mortgages sold to the GSEs prior to the financial crisis of 2008.

According to a report from Reuters, Nomura's lawyer, David Tulchin, said in the closing arguments that the losses incurred by the FHFA were due to macroeconomic factors and not false or misleading statements by the banks. He also said the FHFA had provided little testimony during the trial to back up its claims and that the Agency had relied on "voodoo science" to analyze the mortgage-backed securities, according to Reuters.

Tulchin told MReport in an email that, "Nomura is pleased to have had the opportunity to take this case to trial, and is optimistic about the ultimate outcome."

A lawyer representing the FHFA, Philippe Selendy, pointed to widespread misrepresentation of the quality of mortgage-backed securities on the part of banks leading up to the economic downturn, according to the report. Selendy accused Nomura and RBS of "colossal incompetence" and "deceit" with regards to the documents for the mortgage-backed securities they sold to Fannie Mae and Freddie Mac, according to the report.

Judge Denise Cote is overseeing the non-jury trial in the U.S. District Court of the Southern District of New York in Manhattan. The trial began on March 16.

 

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