Articles Posted in Mortgage-Backed Securities

In yet another mortgaged securities-related resettlement, Royal Bank of Scotland (RBS) has agreed to pay $500M to settle New York Attorney General Eric Schneiderman’s case accusing the bank of misrepresentations and deceptive practices related to it sale residential mortgage-backed securities (RMBS). $400M of the payment is consumer relief, while $100M is a fine that will go to the state.

NY’s probe concentrated on 44 mortgage securitizations that RBS issued leading up to the 2008 financial crisis. The NY AG said that during that time, due diligence vendors cautioned the bank that a lot of the loans it was buying were not in compliance with underwriting guidelines. Still, the bank bundled the loans and touted them as secure to investors, many of whom bought the RMBSs.

Schneiderman’s probe found that some of the mortgages backing the bonds at issue had over 100% loan to value ratios, meaning that “they were ‘underwater’.” Now, RBS is admitting that it sold mortgage bonds backed by loans that failed to abide by underwriting guidelines even as the bank maintained that they were, in fact, in compliance. The bank also acknowledged that it had limited how much diligence it performed on mortgages, resulting in a lot of the loans being securitized even though no due diligence was conducted at all.

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Walter A. Morales III, a money manager who for years worked with high net worth individual investors and pension funds, is now barred from the securities industry. Morales resolved the US Securities and Exchange Commission’s 2012 civil lawsuit accusing him and his Commonwealth Advisors of fraud and mismanagement this week.

The regulator contends that of the approximately $750M that his clients invested through him, Morales and his firm lost over $178M in subprime and residential mortgage-backed securities (RMBSs). According to the Commission, Morales lied about heavy mortgage-backed securities losses to clients and instead tried to conceal them through trades involving his different hedge funds while touting prices that were fraudulent.

The regulator claims that Walters and his investment adviser firm recommended that the hedge funds buy into Collybus, a collateralized debt obligation (CDO) that was considered among the most high risk of such investments and the lowest of tranches. MBSs were sold into CDOs at outdated prices even while Morales was purportedly aware that the market for RMBSs had since dropped. When the CDOs kept doing poorly, Commonwealth employees were directed to engage in manipulative trading among the hedge funds they advised to hide a $32M loss sustained by one of the funds that invested in Collybus.

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In a civil settlement reached with the US Securities and Exchange Commission, Deutsche Bank Securities will repay commercial mortgage-backed securities customers more than $3.7M over allegedly false and misleading statements related to their purchase of these investments. The firm and its ex-CMBS trading desk head trader Benjamin Solomon agreed to resolve the charges against them but without denying or admitting to regulator’s findings.

According to the SEC’s probe, when selling the CMBSs, Deutsche Bank (DB)’s salespeople and traders made statements that were false and misleading. This caused customers to pay too much for the securities because they were not given accurate information about how much the firm had paid for them. Deutsche Bank also is accused of not having properly designed procedures for surveillance and compliance that could stop and identify the types of wrongful behaviors that would cause commercial mortgage-backed securities buyers financial harm while allowing the firm to profit.

To resolve the CMBS fraud charges, Deutsche Bank will pay customers back all profits on the securities’ trades in which a misrepresentation was made. That figure is over $3.7M, including $1.48M of disgorgement. The bank will also pay a $750K penalty.

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According to Reuters, Royal Bank of Scotland Group plc (RBS) has settled a mortgage-backed securities fraud case brought by the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) for $125M. The settlement resolves claims alleging that the bank made misrepresentations when selling MBSs to the pension funds, which contend that they sustained millions of dollars in losses as a result.

According to California Attorney General Xavier Becerra, a probe by his office determined that the descriptions the firm provided to investors “failed to accurately disclose the true characteristics” of many of the mortgages backing the securities, but that RBS, which knew about the alleged misrepresentations, did nothing to remedy them. The state AG’s investigation also found that RBS did not conduct the necessary due diligence to eliminate the loans that were of “poor quality.” Becerra contends that RBS purposely misled CalPERS and CalSTRS to enrich itself. He noted that the MBS fraud settlement gives back the money to the pension funds that the bank “wrongfully took” from them.

Already, The California AG’s office has gotten back more than $1B over securities that were sold to the state’s public pension funds, which sustained losses during the economic crisis of 2008. Last year, $150M was recovered from Moody’s, the credit rating agency. In 2015, $210M was recovered from another credit rating agency, Standard & Poor’s. Other banks to have settled include Citigroup (C) for $102M, Bank of America for $300M and J.P. Morgan Chase (JPM) for $300M.

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A jury in Manhattan federal court found that UBS Group (UBS) owes ex-commercial mortgage-backed securities strategist Trevor Murray $903K after he turned whistleblower on the Swiss lender. Murray contends that he was fired after reporting that CMBS traders had tried to affect his research reports, which were supposed to be independent.

Murray claims that UBS CMBS bond trading head and managing director David MacNamara insisted on screening drafts of the strategist’s reports in advance, which violates firm policy. The former UBS strategist accused Kenneth Cohen, his former boss, of being the one to instigate the pre-clearance process and calling his reports “off message.”

Testifying about one instance, Murray spoke about how Cohen instructed him not to put down anything negative regarding the hotel sector since UBS was engaged in financing for a Miami Beach hotel. The ex-UBS strategist said that he disregarded Cohen’s alleged instructions and notified clients about his worries.

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In New York Court of Appeals, MBIA Insurance Corp. and Credit Suisse Securities USA LLC (CS) presented arguments over whether to resuscitate part of the $235M mortgage-backed securities case brought by the insurer against the financial firm. NY Supreme Court Judge Shirley Werner Kornreich previously took out the fraud claim in MBIA’s case after finding that bond insurer wanted the same damages from both that claim and its contract claim. MBIA has since appealed, arguing that Kornreich misread the facts presented, as well as the applicable case law.

The bond insurer contends that both the contract and fraud claims are separate and valid. Credit Suisse, meantime, maintains that contract and fraud claims are “duplicative.”

In addition to cutting the insurer’s fraud claim from the lawsuit, Kornreich rejected MBIA’s request that she find that Credit Suisse breached its warranties regarding the mortgages’ quality in about 29% of instances. The judge also called MBIA to task for not doing its own due diligence regarding the loans’ quality.

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In New York federal court, Barclays PLC (BAC) is trying to get the US government’s civil residential mortgage-backed securities fraud lawsuit against it dismissed. Prosecutors went after the British bank, a number of its affiliates, and two ex-employees—former mortgage securitizations head Paul Menefee and former subprime loan acquisitions head trader John T. Carroll.

The government contends that the defendants misrepresented the loans packaged in 36 securitizations from 2005 through 2007 were doing well when, in fact, thousands of them had been deemed defective during the vetting process, with hundreds more in default or delinquent.

The RMBS fraud lawsuit is accusing Barclays of letting the loans be packaged into the securitizations despite knowing they were faulty, and even, on occasion, adding in faulty loans that had already been removed from other deals. According to the government, the securitizations failed badly, over half of the mortgages underlying them defaulted, and investors, including banks that were investors, lost billions of dollars.

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Robert Pena, the president and founder of Mortgage Securities Inc., has pleaded guilty to bilking Government National Mortgage Association (Ginnie Mae) of about $2.5M. The now defunct mortgage company was contracted by the government-run corporation, which guarantees mortgage-backed bonds that have been guaranteed by a US government agency, to pool and service eligible residential mortgages. This included collecting principal and interest payments and depositing the money into accounts that Ginnie Mae-held in trust. The company was then supposed to sell the Ginnie Mae-backed mortgage bonds to investors.

However, court documents state that starting in 2011, Pena allegedly diverted funds that borrowers sent his mortgage company, including big-dollar loan payoff checks, into secret, private accounts. He is accused of spending the money on his own business expenses and personal bills. He also purportedly took the escrow funds of borrowers, as well as mortgage-insurance premiums.

Pena is accused of hiding the mortgage fraud by sending Ginnie Mae false reports. The latter was forced to pay investors the about $2.5M that Pena allegedly misappropriated because it had guaranteed their investments.

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In a unanimous ruling, a U.S. Court of Appeals for the 2nd Circuit panel has turned down an appeal by Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings Inc. (NMR) to overturn an order mandating that they pay $839M for the false statements, including misrepresentations, that they are accused of making while selling mortgage-backed securities to Freddie Mac (FMCC) and Fannie Mae (FNMA). The MBS fraud award was issued against the two banks in the Federal Housing Finance Agency’s securities lawsuit. FHFA has been the conservator for Fannie and Freddie ever since the US government took them over after the housing market failed in 2008.

Nomura sponsored $2B of securities that were sold to the mortgage companies. RBS was the underwriter on four of the deals. In a filing submitted to US securities regulators last month, RBS said it is looking to be indemnified by Nomura for the losses.

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This week, Royal Bank of Scotland Group PLC (RBS) has agreed to pay the Federal Housing Finance Agency $5.5B to resolve the latter’s investigation into the UK government-controlled bank’s sale of toxic mortgage-backed securities to mortgage giants Freddie Mac and Fannie Mae leading up to the 2008 financial crisis. RBS has come under fire for the way it packaged and sold subprime mortgages. The violations allegedly involved private-label residential mortgage-backed securities (PLS) trusts that were purchased between 2005 and 2007.

RBS will pay Freddie Mac about $4.5B and approximately $975M to Fannie Mae to resolve this RMBS fraud case. However, the bank is eligible for a $754M reimbursement according to certain indemnification agreements.

RBS had previously reached, for $1.1B, separate settlements over similar MBS fraud claims that the US National Credit Union Administration had brought in Kansas and California. It remains under investigation by the US Department of Justice and several US agencies who are conducting their own mortgage-backed securities fraud probes.

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