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NEW YORK A U.S. housing regulator is set to take two of the world's biggest banks to trial on Monday to try and recoup more than $1 billion in damages over mortgage bonds sold to government-run mortgage finance companies ahead of the 2008 economic crisis.
Lawyers for the regulator will face off with attorneys of Nomura Holdings Inc (8604.T) and Royal Bank of Scotland Group Plc (RBS.L) in a non-jury trial in Manhattan federal court, one of the few cases spilling out of the financial crisis by the U.S. government to reach trial.
Barring a last-minute settlement, the trial would be the first to result from 18 lawsuits filed in 2011 by the Federal Housing Finance Agency (FHFA) to recover losses on some $200 billion in mortgage-backed securities that various banks sold Fannie Mae FNMA.OB and Freddie Mac FMCC.OB.
The FHFA said Japan's Nomura, the securities' sponsor, and RBS, an underwriter, misstated important details of the mortgages underlying more than $2 billion in securities sold to Fannie and Freddie, which came under government control amid the economic upheaval seven years ago.
The FHFA says that 68 percent of a sample of the loans were not underwritten in accordance with underwriting guidelines and that appraised values were inflated on average by 11.1 percent.
Nomura and RBS deny the allegations, arguing no misleading statements were made and any false statements were immaterial.
The FHFA is seeking more than $1 billion. If the banks have to pay damages, they would receive the mortgage bonds in exchange, which earlier this week were valued at $480 million.
The defendants plan to call former Fannie and Freddie employees, including ex-Fannie Mae CEO Daniel Mudd, to show that factors such as falling housing prices and rising unemployment were behind the losses.
Nomura, RBS and the FHFA declined comment before trial.
The banks' decision to go to trial contrasts with competitors, who cut settlements for nearly $17.9 billion following a series of adverse rulings by U.S. District Judge Denise Cote.
Those other banks included Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Deutsche Bank AG (DBKGn.DE) and Goldman Sachs Group Inc (GS.N).
RBS, which paid $99.5 million to resolve claims in one of the lawsuits, faces a separate case in Connecticut federal court over $30.4 billion in mortgage-backed securities.
While the U.S. government has obtained billions of dollars in settlements with banks, few cases have gone to trial.
The U.S. Department of Justice last year secured an order requiring Bank of America to pay $1.26 billion after a jury found it liable for the sale of questionable mortgages to Fannie and Freddie.
Unlike that case, the FHFA's lawsuit is not a law enforcement action but was brought in an investor capacity through lawyers at law firm Quinn Emanuel Urquhart & Sullivan.
The case against Nomura and RBS was set to go to a jury. But in January, the FHFA dropped a key federal securities law claim, enabling it to pursue the case before Cote as a bench trial.
Many of Cote's rulings in the FHFA case have been favorable to the government agency, including denying bids to dismiss the case. The banks have in court filings complained about her "gravely prejudicial" decisions.
At a hearing Monday in the FHFA case, Cote said she had already begun reviewing some of the evidence and drafting a decision, but gave no indication of which way she would rule in the trial.
The case is Federal Housing Finance Agency v Nomura Holding America Inc, U.S. District Court, Southern District of New York, No. 11-06201
(Editing by Noeleen Walder and Grant McCool)