Banks Seek to Overturn Judge’s Ruling in Critical Mortgage Case

The nation’s largest banks, facing a torrent of lawsuits over shoddy mortgage securities, are pushing to overturn a series of tough ruling in an important case.

In a rare move, 15 banks â€" including Bank of America, Citigroup, JPMorgan Chase and UBS â€" filed a motion in Federal District Court in Manhattan late Tuesday night to throw out a series of decisions by  Judge Denise Cote, accoring to a copy of the court filing. In doing so, the financial institutions are aiming to broaden the amount of evidence they can gather in the hopes of quashing the lawsuit.

The rulings, the banks argue, are so “gravely prejudicial” that the firms had no choice, a step that was not “taken lightly.”

The case could have costly implications.

In 2011, the Federal Housing Finance Agency, which oversees the housing giants, Fannie Mae and Freddie Mac, accused the banks of duping them into purchasing $200 billion of mortgage securities that ultimately imploded during the financial crisis. On Wall Street, the lawsuit is considered a critical litmus test for how successful the banks will be in staunching their losses from the mortgage litigation.

The banks have been aggressively trying to derail the lawsuit. In November, Judge Cote denied requests by the banks to toss out the lawsuit altogether.

Now, the banks are trying to reverse her rulings that limit the amount of so-called discovery they can collect, including depositions and internal documents. The decisions, according to the court filing, unfairly constricts the banks, undercuts their ability to fight the lawsuit and is “grossly inequitable.”

In a May 2012 order, Judge Cote ruled that the banks could take a total of only 20 depositions â€" or interviews â€" from current and former employees at Fannie Mae, Freddie Mac and the Federal Housing Finance Agency. The limited scope of the interviews leaves the banks, the court filing claims, without a full understanding of Fannie and Freddie’s operations.

By comparison, the Federal Housing Finance Agency can gather 400 depositions, under the judge’s ruling. Her decision also prevents the banks from gathering additional information from a major unit within the mortgage finance firms that evaluated home loans before they were packaged and diced into the complex investments.

“This structure creates an extraordinarily uneven playing field that deprives petitioners of the right to confront the claims against them, while giving F.H.F.A. a distinct advantage,” the banks’ filing says.

Judge Cote reaffirmed the rules governing discovery in a separate order filed last month. In that order, the judge reiterated that “defendants as a group may take 20 depositions of F.H.F.A.” Even the Federal Housing Finance Agency proposed a more generous deposition cap of 40 total, the banks argue.

The banks assert in the court filing that the limitations will hobble their defenses while unfairly allowing the housing agency to plow ahead with its case. The decision, the filing says, will ultimately force the banks to settle the case.
Judge Cote did not respond to repeated requests for comment.

The move is the latest effort by big banks to put the mortgage mess â€" and the related legal headaches â€" behind them.

In recent years, the banks have been overwhelmed with a raft of lawsuits filed by federal and state authorities, as well as private investors. The lawsuits center on a dismal chapter in banks’ histories when Wall Street sold billions of dollars of subprime mortgages that soured, causing the banks and investors to incur vast losses.

In the latest salvo, Citigroup agreed earlier this month to pay $730 million over accusations that the bank deceived investors in securities backed by mortgage loans. Citigroup did not admit wrongdoing.

The lawsuits show no signs of abating. In October, federal prosecutors in Manhattan accused Bank of America of fraud, claiming the firm’s subprime lender Countrywide Financial churned out loans at such a fast clip that quality controls were almost entirely flouted.

Analysts say the mortgage-related litigation is among the greatest threats to the industry’s profit. In the fourth quarter, Citigroup’s profit was eroded by a $1.3 billion legal bill.