RBS could face new fines over US mortgage bonds

RBS sign Image copyright AFP

Taxpayer-backed Royal Bank of Scotland (RBS) could face further fines in the United States following a court ruling on Monday regarding the sale of mortgage bonds to investors.

A US judge found Japanese bank Nomura made false statements when selling bonds to US agencies Fannie Mae and Freddie Mac between 2005 and 2007.

Of the seven deals, RBS underwrote four valued at a total of $2bn (£1.28bn)..

The ruling opens the door for US authorities to recover $450m.

Freddie Mac and Fannie Mae are US government backed agencies that buy mortgages from banks and sell them as bonds to investors on the open market.

The value of those bonds plummeted in the wake of the financial crisis.

'Materially defective'

District Judge Denise Cote ruled in favour of a suit brought by the Federal Housing Finance Agency (FHFA) saying supporting documents offered by Nomura "did not correctly describe the mortgage loans".

"The magnitude of falsity, conservatively measured, is enormous," she added.

Judge Cote said the securities sold to Fannie Mae and Freddie Mac "were supported by loans for which the underwriting process had failed," with deals comprised of 45% to 59% "materially defective" mortgages.

Nomura's lawyers claimed any losses incurred by Fannie and Freddie were not the banks' fault and were due to overall market conditions.

But the judge said the banks "have not quantified the loss that they say is due to macroeconomic factors".

Nor did the banks deny that "there is a link between the securitization frenzy associated with those shoddy practices and the very macroeconomic factors that they say caused the losses to the certificates," she wrote.

The exact amount of damages to be awarded was unclear. Judge Cote ordered the FHFA to submit a proposed judgment with updated damages figures based on her ruling by Friday.

But she said the FHFA was entitled to $624.4m, minus more than $178m in payments already made since the lawsuit began in 2011.


The FHFA welcomed the ruling, despite the amount appearing to be significantly lower than the $1bn it had sought during the trial.

FHFA general counsel Alfred Pollard said: "It is clear the court found that the facts presented by FHFA were convincing."

Nomura said in a statement that it planned to appeal, saying it was "confident that it was consistently candid, transparent and professional in all of its dealings with Fannie Mae and Freddie Mac".

RBS declined to comment.

The lawsuit is the only one to so far have gone as far as a trial out of the 18 lawsuits file by the US regulator filed in 2011 regarding $200bn worth of mortgage-bonds sold to Fannie Mae and Freddie Mac by numerous banks in the lead up to the financial crisis.

The FHFA has already reached settlements worth a total of $17.9bn with banks including Bank of America, JPMorgan Chase & Co and Deutsche Bank.

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