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August 4, 2016

Stroock Special Bulletin

By: David J. Kahne

This week, Stroock & Stroock & Lavan LLP filed a brief in a significant “put back” residential mortgage backed securities (RMBS) case in the Court of Appeals on behalf of the Securities Industry and Financial Markets Association (SIFMA).  The case, BNY Mellon v. WMC Mortgage, involves the interpretation of “gap” or “bring-down” representations and warranties made by a securitization sponsor in an RMBS transaction.  “Gap” or “bring down” warranties are a common feature of RMBS transactions and are used to fill temporally limited gaps of coverage for investors in the time between loan origination and the closing of a securitization. 

In BNY Mellon v. WMC Mortgage, the First Department expanded the potential liability of sponsors by finding that the “gap” representations by J.P. Morgan Acquisition Corporation (JPMMAC) were not limited in time and included many of the same representations made by the loan originator, WMC Mortgage, LLC.  SIFMA argued, supporting JPMMAC’s position, that it would have made little sense in the context of the transactional structure and in the RMBS industry, more generally, for JPMMAC to have duplicated WMC’s loan origination-level representations.  The First Department’s liability widening interpretation would disrupt the contractually negotiated allocation of risk and alignment of economic incentives and obligations among the parties.  More broadly, SIFMA argued that without the certainty attached to the enforcement of similarly-worded “gap” warranties, market participants (and securitization sponsors, in particular) would be unable to properly assess and limit their exposure to breach of representation and warranty suits, creating market hesitancy to sponsor such securitization transactions. 

Michael C. Keats, a Partner in Stroock’s Litigation Practice Group,  and David J. Kahne, an associate in the Litigation Practice Group, worked on the brief. 


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