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Nomura’s Penalty in Mortgage-Backed Securities Lawsuit Increased to $839 Million

money-two [1]Nomura Holdings [2] and the Royal Bank of Scotland (RBS [3]) have agreed to pay an extra $33 million in addition to the $806 million a judge ordered them to pay for allegedly misrepresenting the quality of mortgage-backed securities sold to Fannie Mae [4] and Freddie Mac [5] in the run-up to the financial crisis, according to media reports [6].

The total brings the penalty to $839 million for Nomura and RBS in a suit brought about by the GSEs' conservator, FHFA, in 2011, according to a report from Reuters [6]. The Agency alleges it suffered monumental losses when the sponsor of the mortgage-backed securities, Nomura, and the securities' underwriter, RBS, did not follow underwriting guidelines on 68 percent of a sample of a bundle of securities backing more than $2 billion worth of mortgages sold to the GSEs prior to the financial crisis of 2008.

In May after a two-month non-jury trial, U.S. Judge Denise Cote found Nomura and RBS liable for its role in the sale of the shoddy mortgage-backed securities to Fannie Mae and Freddie Mac and ordered the two banks to pay $806 million in penalties. Nomura and RBS agreed to pay the $33 million if they pay at least $413 million for state law violations alleged by the FHFA. If the amount the banks pay for state law violations is reduced to $272 million, the parties agreed to let Cote decide how much of the extra $33 million should be paid, according to Reuters. According to the agreement, any amount for state violations that is less than $272 million will void the agreement.

Nomura was one of 18 lenders sued by the FHFA in 2011 to recoup U.S. taxpayer costs following the government's $188 billion bailout of Fannie Mae and Freddie Mac in 2008, after which the government seized control of both Enterprises. Nomura was the first one of the lenders to take the FHFA to trial; 16 lenders settled with the FHFA for a combined total of about $18 billion and the other lender sued, RBS, is awaiting trial in a case separate from the Nomura one.

The FHFA has a separate suit pending against RBS [7] in the U.S. District Court in Connecticut over the selling of about $32 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac before the crisis. The bank had set aside about $3 billion for a possible settlement but reports surfaced that the FHFA might ask as much as $7.7 billion. The case should go to trial sometime next year if a settlement is not reached. In late August, RBS lost a bid [8] to have the FHFA's suit dismissed.