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Mortgage-Backed Securities Litigation

Syncora Guarantee Inc. v. EMC Mortgage Corp., 09-3106 (S.D.N.Y.) Manhattan

Summary:

Syncora Guarantee (formerly XL Capital Assurance Inc.) filed this action against EMC, a subsidiary of Bear Stearns (now J.P. Morgan Securities Inc.) over $666 million in bonds backed by a pool of 9,871 residential mortgage loans. EMC purchased the loans and bundled them into mortgage-backed securities, which were then sold to investors. XL Capital (now Syncora) contracted with EMC and Bear Stearns to provide financial guarantee insurance for the securities, protecting the payments of principal and interest for the most senior, investment-grade securities. EMC made a number of representations to EMC regarding the loan pool and individual loans, such as the “practices used to originate, underwrite, and service the loans.” Syncora made its risk evaluation based on those representations. However, Syncora alleges that the majority of the bundled loans did not comply with the promised quality, and that the widespread defaults and poor performance that followed represented breaches of EMC’s warranties. Syncora claims “that after hiring consultants to investigate poor loan performance, it learned that more than 85% of a randomly selected pool of loans contained defects that breached the loan-level warranties.” Syncora alleges that it has had to pay out hundreds or millions of dollars in connection with defaults on the loans, and will be forced to pay hundreds of millions more. Syncora filed the action and brought claims of breach of contract and breach of warranty, has demanded indemnification, and seeks to force EMC to repurchase (or replace) the loans. The random pool of loans reviewed was approximately 400 out of the 9,871 loans. Based on the results of the sample, Syncora argued that EMC should be required to repurchase the loans on a pool-wide basis; EMC argued that Syncora must analyze each loan individually and that EMC would be required to repurchase only loans identified as violating representations on this individual basis.

Status:

On 25 March 2011 the court sided with Syncora and granted summary judgment, ruling that Syncora could rely on its sample analysis of 85% defects in 400 loans in order to require EMC to repurchase the loans on a pool-wide basis.

News:

  1. http://www.reuters.com/article/2011/03/28/jpmorgan-emc-ruling-idUSN2828991820110328

Documents:

  1. http://jpmorgan-watch.com/files/9_syncora_v_emc_d&o_on_sampling_of_securities.pdf
  2. http://jpmorgan-watch.com/files/7_syncora_v._emc_complaint.pdf