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Nomura Found Liable For Selling Toxic Mortgage-Backed Securities to GSEs

courtroom [1]The nearly two-month long court battle between the Federal Housing Finance Agency (FHFA [2]) and Nomura Holdings [3] came to an end Monday when a federal judge found the bank liable for selling shoddy mortgages to Fannie Mae [4] and Freddie Mac [5] prior to the 2008 financial crisis.

In a 361-page ruling, Judge Denise Cote said that the magnitude which Nomura and co-defendant Royal Bank of Scotland deceived the GSEs regarding the mortgage-backed securities was "enormous."

"FHFA is pleased with the Court’s decision and we are reviewing the various elements of this important ruling.  It is clear the Court found that the facts presented by FHFA were convincing," FHFA General Counsel Alfred Pollard said. "FHFA looks forward to submitting proposed damages calculated under the formulae applied in the Court’s Opinion."

Attorneys for Nomura were not immediately available for comment.

The non-jury trial began March 16 in the U.S. District Court in the Southern District of New York in Manhattan with Cote presiding. Nomura and RBS 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 [4] and Freddie Mac [5] 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, Nomura, and the securities' underwriter, RBS, 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.

An attorney for Nomura claimed during the trial [6] that the losses incurred by the FHFA were due to macroeconomic factors and not false or misleading statements by the banks, while an attorney for FHFA accused Nomura and RBS of "colossal incompetence" and "deceit" with regards to the documents for the mortgage-backed securities they sold to the GSEs.

The FHFA has a separate suit pending against RBS [7] in the U.S. District Court in Connecticut over the selling of about $32 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac before the crisis. The bank had set aside about $3 billion for a possible settlement but reports surfaced that the FHFA might ask as much as $7.7 billion. The case should go to trial sometime next year if a settlement is not reached.

In June 2014, RBS agreed to pay $99.5 million [8] to settle a separate FHFA suit claiming that the bank sold more than $2 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac between 2005 and 2007, the years of the "housing bubble" in the U.S.