In a setback for investors suing Lehman Brothers over losses on residential mortgage-backed securities, a U.S. bankruptcy court judge has refused to more than double the estimated value of more than 209,000 residential mortgages underlying the investors’ claims.

A group of trustees had asked Judge Shelley Chapman to increase the valuation to $12.1 billion from $5 million. They are suing to get what remains of the Lehman Brothers bankruptcy estate to buy back the infringing loans.

Lehman Brothers had argued that a ruling in favor of the trustees would imperil its ability to make more distributions to creditors because it would have had to set aside funds to reflect an increase in the valuation of the mortgages.

A February 2012 ruling found that $5 billion was enough to cover trusts on their claims that Lehman violated representations and warranties on the mortgage-backed securities. But after hiring experts to analyze a sample of 5,000 loans, the trustee group estimated their total claims at more than $12 billion.

On a related issue, Judge Chapman dealt investors another blow earlier this week by ruling that the 209,000 mortgages must be analyzed individually rather than through statistical sampling, the method favored by the trustee group.

According to one forensics expert for the trustees, the loan review could take 21 years to complete; Lehman’s experts say it would only take a year.

“This is just a nightmare,” a banker involved in the case told National Mortgage News. “It obviously won’t take 21 years, but the intent is clear that Judge Chapman is opening this thing for a settlement.”

Lawyers for the two parties had by the end of Friday to tell Judge Chapman whether they have agreed on a protocol for reviewing the loan pool. If they have not agreed, they will have until the end of Tuesday to submit competing proposals.

The $12.1 billion estimate that Judge Chapman declined would have equaled 10% of the original pool amount. Lehman argued that settlements by other RMBS issuers, including JPMorgan Chase and Citigroup, did not include recoveries that high.

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