MADISON, Wis. – In the latest punch-up over the crash in the mortgage market, CUNA Mutual Group has filed suit against RBS Securities and asked a federal court here to order the Wall Street bank to buy back $72 million in failed residential mortgage backed securities it sold to the credit union insurer’s MEMBERS’s Life Insurance Co. and CUMIS Insurance Society units.
The suit, originally filed in state court but removed yesterday to the U.S. District Court for the Western District of Wisconsin, claims the Wall Street bank packed 10 RMBS containing 15 certificates with subprime mortgage loans originated by five lenders that have since filed for bankruptcy and inflated the value of the mortgages in order to sell them to investors. The lenders, all of whom have filed Chapter 11 bankruptcy over the past few years, are Washington Mutual, First Magnus Financial Corp., Delta Funding, New Century Mortgage Corp., and Fremont Investment & Loan.
In its suit, CUNA Mutual claims the bankrupt lenders made misrepresentations to RBS about the loan underwriting standards and the nature of the collateral backing the loans, which the Wall Street bank is adjudicating on its own with the remnants of those lenders. Those misrepresentations led RBS to misstate the value of the MBS, which were based on erroneous loan-to-value ratios and owner-occupancy ratios, among other things, according to CUNA Mutual, which is seeking to exercise the rescission clause in the sale of the MBS.
“RBS’s representations regarding the underwriting processes, underwriting quality, loan selection, credit enhancements, use of exceptions and ratings were all false,” claims CUNA Mutual. “The mortgage loans underlying CUNA Mutual’s certificates did not comply with the underwriting standards described in the Offering Documents because those standards were systemically ignored.”
The claims are similar to those alleged by NCUA in a suit it has filed against RBS Securities for its sale of $1.1 billion of MBS to WesCorp FCU, the one-time $34 billion corporate credit union that failed in 2009 amid $7 billion of losses. NCUA has also filed similar civil suits in the failure of the corporate credit unions against other Wall Street banks, including Goldman Sachs, JP Morgan Chase and Wachovia Securities, which is now a unit of Wells Fargo & Co.
CUNA Mutual makes clear it is not alleging that RBS intentionally or knowingly misrepresented the quality of the loans in the pools back the RMBS, “but RBS’s misrepresentation, even if negligently or innocently made, entitle CUNA Mutual Group to rescind its purchases of the 15 certificates,” said the credit union insurer in its suit.
CUNA Mutual, which bought the securities for its MEMBER’s Life and CUMIS Insurance subsidiaries between 2004 to 2007, said after the MBS began to go sour it hired a forensic auditor who reviewed 17,949 loans, or 40% of the total number of loans in the MBS, and discovered, among other things, that the Wall Street bank vastly understated both the LTV and the combined LTV for each of the securities, and significantly over-stated the owner-occupancy ratio for the pools of loans, a key indicator of the rate at which the loans will be repaid. Those figures, claims CUNA Mutual, caused the rating agencies to overstate the credit ratings on the bonds, which helped convince CUNA Mutual’s subsidiaries to buy the securities. “The agencies projected the performance of the RMBS based on false assumptions,” says the suit.
"This action is about righting a wrong and is being taken in the best interests of CUNA Mutual Group and its policyholders,” said Jim Buchheim, vice president of corporate communications at CUNA Mutual. “The complaint we filed fully explains why we took this action. However, because this issue is in litigation, we will not comment further on the lawsuit."
Lawyers for RBS Securities, did not immediately return a phone call seeking comment.
