MADISON, Wis. – RBS Securities rebutted efforts by CUNA Mutual Group to force it to buy back $72 million worth of troubled mortgage backed securities it sold, saying the credit union insurer’s complaint should instead be targeted at others, including the lenders who originated the loans, the Wall Street agencies who rated the bonds, real estate appraisers and even borrowers of the loans packaged into the securities.
“RBS Securities did not make any of the alleged misrepresentations,” said the Wall Street bank in a motion to dismiss the suit. “To the contrary, each of the alleged representations at issue was made either by originators (with respect to underwriting guidelines), borrowers (with respect to owner-occupancy), ratings agencies (with respect to credit ratings), and appraisers (with respect to loan-to-value ratios).”
“Indeed, RBS specifically disclaimed the making of these representations,” said RBS. “Because CUNA [Mutual] does not challenge any representation made by RBS, does not allege that RBS had knowledge of the purported misrepresentations, and does not allege that RBS failed to exercise ordinary care in ascertaining the facts, its claims should be dismissed.”
In a suit filed in federal court here, CUNA Mutual says RBS’s misrepresentation, “even if negligently or innocently made, entitle CUNA Mutual Group to rescind its purchases” of the MBS.
CUNA Mutual claims the Wall Street bank packed 10 MBS sold to its MEMBERS Life Insurance Co. and CUMIS Insurance Society subsidiaries 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.
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 also is the target of a civil suit brought by NCUA for the sale of MBS it sold to failed corporate credit unions WesCorp FCU and U.S. Central FCU.
RBS says CUNA Mutual bought the securities rated borderline speculative by ratings agencies the credit union insurer and it was warned that the MBS were “more subject to adverse economic conditions” than higher-rated MBS. “What’s more, the certificates that CUNA purchased were subordinated – that is, they were either the last in line or very close to it to be paid of all the certificates issued from a particular deal.”
“CUNA [Mutual] took on this risk willingly, to seek the high rates of return these securities offered,” argued RBS. “Indeed, at the same time it purchased these certificates, CUNA was actively encouraging smaller credit unions – whose credit risk it was tasked with monitoring – to increase their own volume of subprime lending. Now, four years after the greatest financial crisis since the Great Depression overwhelmed the MBS market, CUNA brings a single claim for rescission on the basis of alleged misrepresentations in Prospectuses and Prospectus Supplements.”
To fuel its growth, said RBS, CUNA Mutual took on increasing risk. “While CUNA alleges that it was misled by ‘inflated’ credit ratings, including those assigned to senior tranches of the MBS, the majority of the certificates CUNA purchased were in fact rated borderline speculative by ratings agencies – the lowest investment grade possible.”
RBS says the prices that CUNA Mutual paid for the MBS reflected the increased risk CUNA Mutual accepted. CUNA Mutual, said the Wall Street bank, bought the bulk of the certificates at issue at a discount from par – that is, for less than the certificate’s face amount. These discounts ranged from 7% to 24%, depending on the certificate.
“Eight years after CUNA [Mutual] began purchasing subordinated and borderline speculative securities in its quest for higher returns, CUNA jumped on the litigation bandwagon, seeking to rescind its purchases,” stated RBS. “CUNA’s Complaint relies on made-for-litigation, implausible theories and allegations that are belied both by the nature of the discounted MBS at issue as well as CUNA’s own allegations.”
