UBS (UBS) is on trial in Manhattan federal court. According to Reuters, the civil case was brought by UBS Bancorp (USB) for three trusts. The trusts claim that in their contract with the Swiss banking giant, UBS agreed that the mortgages backing the securities would satisfy certain standards. However, they contend, when it became clear the mortgages were faulty, UBS would not repurchase them. Now, the trusts want back the $2.1B that they lost.
UBS’s legal defense team argued that the lawyers of the trust are assessing the loans from the perspective of “hindsight bias.” They want U.S. District Judge Kevin Catel to evaluate whether when the loans were considered defective at the time that they were issued in 2006 and 2007.
According to the mortgage-backed securities lawsuit, over 17,000 loans were pooled into three trusts, which issued securities granting investors the right to borrower-made payments. The problem was, contend the plaintiffs, over 9,600 of the loans were defective, primarily because of borrower fraud or because they did not meet underwriting requirements. The trusts believe that UBS did not properly vet the loans, which it obtained through shady lenders that would go on to fail.
It was in 2013 that UBS was ordered to pay $358M to Assured Guaranty to settle mortgage-backed securities claims. Assured claimed breach of promise regarding the quality of loans backing $1.5B of securities. Assured, which had agreed to insure these securities, accused UBS of obtaining inflated assessments from ratings companies.
In other mortgage case news, Royal Bank of Scotland PLC unit (RBS) RBS Securities said that a federal district court judge failed to properly weigh how much Freddie Mac (FMCC) and Fannie Mae (FNMA) knew about the mortgage industry when she ordered the firm and Nomura Holdings (NMR) to pay $806M for allegedly selling the two companies faulty mortgage-backed securities.
In a reply brief, RBS Securities said that when deciding whether the defendants misled Fannie and Freddie, U.S. District Judge Denise Cote should have factored the mortgage companies’ understanding of the industry and that they knew that a lot of the mortgage securities they bought from banks involved subprime loan. Instead, RBS Securities said, Cote issued an improper ruling in favor of the Federal Housing Finance Agency, which is the conservator of Freddie and Fannie.
Last year, Judge Cote said RBS Securities and Nomura should be held liabile for selling the poor-quality mortgage bonds to Freddie and Fannie. Both banks appealed.
Also this month, a deal was announced in which Goldman Sachs (GS) agreed to pay $5.06B to resolve charges accusing the firm of deceptive mortgage practices leading up to the 2008 financial crisis. As part of the settlement, Goldman admitted to making representations about the MBS that were false and misleading to potential investors. It also acknowledged that leading up to the financial crisis, a significant chunk of the mortgages it put together with the securities were not in alignment with what investors were told about the loans.
UBS blamed in U.S. trial for $2.1 billion in mortgage bond losses, Reuters/Yahoo, April 18, 2016
UBS to Pay Assured Guaranty $358 Million in Settlement, Bloomberg, May 6, 2013
Nomura, RBS Ordered to Pay $806 Million to Housing Agency, Bloomberg, May 15, 2015