US regulator puts two banks on trial

A US housing regulator is set to take two of the world’s biggest banks to trial on Monday to try to recoup more than $1bn (€955m) in damages over mortgage bonds sold to government-run mortgage finance companies ahead of the 2008 economic crisis.

Lawyers for the regulator will face off with attorneys of Nomura Holdings Inc and Royal Bank of Scotland Group Plc in a non-jury trial in Manhattan federal court, one of the few cases spilling out of the financial crisis by the US government to reach trial.

Barring a last-minute settlement, the trial would be the first to result from 18 lawsuits filed in 2011 by the Federal Housing Finance Agency (FHFA) to recover losses on some $200bn in mortgage-backed securities that various banks sold Fannie Mae and Freddie Mac.

The FHFA said Japan’s Nomura, the securities’ sponsor, and RBS, an underwriter, misstated important details of the mortgages underlying more than $2bn in securities sold to Fannie and Freddie, which came under government control amid the economic upheaval seven years ago.

The FHFA says that 68% of a sample of the loans were not underwritten in accordance with underwriting guidelines and that appraised values were inflated on average by 11.1%.

Nomura and RBS deny the allegations, arguing no misleading statements were made and any false statements were immaterial.

The FHFA is seeking more than $1bn. If the banks have to pay damages, they would receive the mortgage bonds in exchange, which earlier this week were valued at $480m.

The defendants plan to call former Fannie and Freddie employees, including ex-Fannie Mae CEO Daniel Mudd, to show that factors such as falling housing prices and rising unemployment were behind the losses.

Nomura, RBS and the FHFA declined comment before trial.

The banks’ decision to go to trial contrasts with competitors, who cut settlements for nearly $17.9bn following adverse rulings by US District Judge Denise Cote.