Statutes of Limitation Fuel Banks' Wave of Mortgage Bond Claims

September, 2011
American Banker Andrew Raines

NEW YORK - The clock is running down on investors looking to sue the nation's biggest banks over now-soured mortgage-backed securities.

Statutes of limitation are creeping up quickly, a factor in the recent wave of lawsuits by investors against banks that has unnerved investors in the past several months, say lawyers.

Key points in time for investors looking to sue are the dates they bought mortgage-backed bonds - and the dates it became clear, from a legal standpoint, that the bonds had problems due to heavy defaults by borrowers.

For instance, recent lawsuits against 17 banks by the Federal Housing Finance Agency, the regulator for housing giants Fannie Mae and Freddie Mac, came as FHFA pressed to beat the three-year anniversary of Fannie's and Freddie's failure last week, ensuring the regulator didn't miss a possible deadline, people familiar with the situation have said.

The statute for federal securities suits can be as short as one year, and in many cases is already up, say lawyers.

Claims that allege information documents for mortgage-backed securities were faulty fall under different laws, and start timing out two years after discovering the fraud or five years after the sale.

"Securities claims are more or less starting to time out now," said a New York lawyer representing investors suing over claims. "I think some of the suits that have gotten filed have been motivated by this."

Bank of America's global head of legal, compliance and regulatory relations, Gary Lynch, recently told Bloomberg Businessweek he also thought the recent influx of lawsuits was driven by statutes. A Bank of America spokesman declined to comment.

Financial fraud expert Janet Tavakoli, of Tavakoli Structured Finance Inc., said she is surprised some investors have dragged their feet so long.

But to be sure, the risk of lawsuits isn't going away because of deadlines. Legal arguments exist for both sides.

The clock is different in some states and stops in certain circumstances. Some clocks start at purchase of the bonds, others at discovery of the problems.

When a trustee sues a bank on behalf of investors - such as the recent $1.75 billion suit filed against Bank of America Corp. (BAC) in the name of U.S. Bancorp - the suit follows contract law, which has longer statutes.

However, those claims have few judicial rulings about limitations to base decisions on, leaving room for argument. Some will argue the clock starts at the signing of the contract, others when the bank rejects a claim on the contract to repurchase the loans, a more recent event.

Also, a statue of limitation doesn't stop a claim from being filed - and the headline risk to bank stocks. The suit can exist until a judge rules it is too late.

Andrew Raines, a partner at California law firm Raines Feldman who specializes in real-estate and transactions, said limitation arguments aren't a "frivolous issue" and could be the center of valid arguments over the coming years.

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