Investors in residential mortgage backed securities (RMBS) need to be mindful of when the clock on representations and warranties (R&W) claims starts ticking, and not just how long it runs, according to Standard & Poor’s report.
A report published Friday, S&P looked at two recent New York State Supreme Court decisions regarding claims arising from breaches of R&Ws as to the underwriting standards in RMBS that “significantly differed in their analyses of how the six-year statutes of limitations on R&Ws are applied."
New York sets a six-year statute of limitations for contractual R&W claims. The length of statutes of limitations in other jurisdictions vary, but none is over 10 years -- California's is four-years and Florida's is five years.
What is being disputed in the courts, however, is not the length of statutes but when the clock starts ticking. One court ruling stated that the statute of limitations began when the R&Ws were made and the second ruling states that the statute of limitation began when the defendant refused a repurchase demand.
On May 10, 2013, the Supreme Court of the State of New York granted the defendant's motion to dismiss the action in Nomura Asset Acceptance Corp. Alternative Loan Trust Series 2005-S4 v. Nomura Credit & Capital.
According to the report, HSBC Bank USA N.A., the trustee of a 2005 RMBS securitization, sued Nomura Credit, the seller/sponsor, for various breaches of R&Ws.
The court concluded that the action was barred because “the plaintiff initiated it after the applicable statute of limitation for contract claims had expired.”
The court reasoned that the R&Ws were false when they were made and constituted a breach at the time. Therefore the statute of limitation ran from the time the R&Ws were originally made rather than from the time the trustee demanded repurchases.
In a second ruling, that came three days later, on the ACE Sec. Corp. v. DB Structured Prods., a different judge in the same court rejected the seller/sponsor's rationale that the statute of limitations ran from the time the R&Ws were made.
Instead the court determined that the statute of limitations began only when the plaintiff's repurchase demand was refused.
Investors, said S&P, should consider both possible results when looking at R&W provisions in U.S. RMBS transactions.
“In our opinion, these decisions demonstrate the potential difficulty of pursuing claims arising from breaches of R&Ws in U.S. RMBS transactions, and therefore the importance of upfront due diligence and consideration of operational factors, points we have previously stressed,” said analysts at S&P.
S&P said that these limitations set by the court decisions are as key to its R&W analysis as the sunset provisions set in some recent non-agency RMBS deals that limit an originator’s obligation to repurchase troubled loans on certain R&W breaches.