Credit: Shutterstock photoIn order to resolve the mortgage bond case, Nomura Holdings, Inc.NMR and The Royal Bank of Scotland Group plcRBS , two of the world's biggest banks, have agreed to a settlement. Per the terms of the settlement, the banks will be paying an additional $33 million over and above $806 million, which they were ordered to pay by a US judge in May 2015 over misrepresentation of documents in selling of mortgage backed securities.
The agreement of the settlement was disclosed last week in Manhattan federal court. Moreover, the settlement covers Federal Housing Finance Agency's ('FHFA') legal costs incurred for the trial of the case.
The global financial giants will be paying an additional $33 million, if following an appeal minimum payment of $413 million is made by the banks for violating state law. If the amount paid is around $272 million, the U.S. District Judge will determine the amount out of $33 million to be paid. If payment is below $272 million, the agreement would be annulled.
The Royal Bank of Scotland and the regulator did not comment, while Nomura declined to comment.
Accusation
Notably, the banks were accused by the FHFA of providing fraudulent details regarding mortgages sold to the government-backed mortgage financiers, Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp. FMCC .
The FHFA has accused the Japan-based Nomura, sponsor of the above mentioned securities, and Royal Bank of Scotland, the underwriter, of providing it with misleading details about securities worth $2 billion. Both were found guilty in May by U.S. District Judge Denise Cote in Manhattan after a non-jury trial and were directed to pay $806 million including $26.6 million to Fannie Mae and $779.4 million to Freddie Mac.
Many financial institutions resorted to inappropriate, misleading, aggressive and fraudulent methods to boost their mortgage operations during the pre-crisis period that fuelled the sub-prime mortgage crisis. Consequently, Freddie Mac and Fannie Mae reached the brink of bankruptcy and the government intervened to rescue these lenders.
In order to avoid such dire situations in the future, the regulators started implementing stringent restrictions. Consequently in 2011, the FHFA sued 18 financial organizations, including Wall Street majors like The Goldman Sachs Group, Inc. (GS) and Bank of America Corp. (BAC) for selling faulty mortgage-backed securities to Freddie Mac and Fannie Mae that caused investors severe losses. FHFA has reached nearly $17.9 billion in settlements with several of these banks.
Conclusion
Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices. Such settlements help restore their confidence in law enforcement agencies. Moreover, it reduces the existing litigation burden of banks.
Both Nomura and Royal Bank of Scotland carry a Zacks Rank #3 (Hold).
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NOMURA HLDG-ADR (NMR): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
