NCUA FIGHTS TO KEEP SUIT AGAINST WESCORP ALIVE
LOS ANGELES-NCUA urged a federal judge here not to dismiss its claims against underwriters of more than $1 billion of mortgage-backed securities sold to WesCorp FCU, as the regulator's numerous legal claims in the corporate failures appear to be slipping away.
In a response to the judge's tentative ruling to dismiss its suit against RBS Securities, NCUA urged the judge to reject the bank's defense that more than $1 billion of WesCorp MBS it underwrote went bad because of the 2007-2008 meltdown of the mortgage market and not because of any of its own actions.
Rather, NCUA asserts the vast majority of the MBS losses occurred in 2006 and 2007-"long before the U.S. economy began to decline," suggesting the problems stemmed from bad loans being made, NCUA told the judge.
NCUA's response comes after Judge George Wu issued a preliminary ruling last month that NCUA has failed to show that the Wall Street bank and related entities disregarded their own underwriting standards in the creation and sale of $1.1 billion of MBS to WesCorp, the one-time $34-billion corporate that failed in 2009.
The preliminary ruling by Judge Wu, who earlier rejected NCUA's separate civil negligence claims against directors of WesCorp, casts doubt on several other suits NCUA has brought against Wall Street banks, including JP Morgan Chase, Goldman Sachs and Wachovia Securities (now part of Wells Fargo) in the failure of five other corporate credit unions, as well as WesCorp. NCUA claims the Wall Street banks ignored their own underwriting standards when they bought and packaged subprime loans for sale as MBS to the doomed corporates.
The stakes in the legal battle are enormous as dozens of other entities, including several Federal Home Loan Banks, Fannie Mae and Freddie Mac, have filed similar suits against Wall Street banks who sold them billions of dollars of MBS that eventually went sour.
The gist of the plaintiffs' claims are that the banks sold trillions of dollars in MBS purportedly backed by solid mortgages which were instead, packages of subprime loans that were disguised by so-called credit enhancements; over-collateralization and private bond insurance. But when the loans began to falter so did the over-collateralization, while the private bond insurance became an illusion, as all of the major bond insurers became insolvent, as a byproduct of the mortgage meltdown.
In his preliminary ruling Judge Wu said NCUA relied too much on statistics showing how the investments failed following the collapse of the housing market, which Wu described as "conclusory." Without additional information, he said, the suit would fail the pleading standards set forth in prior rulings. He also expressed doubts whether the relevant statute of limitations on the civil claims had expired on the sale of the MBS-some of which occurred as early as 2005 and 2006-before NCUA filed its suit last July.
NCUA rebutted the statute of limitations claims, saying the clock did not start running on the relevant statutes until NCUA took WesCorp under conservatorship in March 2009 and thus was able to comprehensively review the records of the failed MBS in order to determine whether misrepresentations occurred in their purchase.
At the core of the numerous suits NCUA asserts the main purpose of RBS and the other Wall Street banks in securitizing mortgages originated by other lenders was the practice known as "originate-to-distribute," with no concern by the banks whether the mortgage loans were properly underwritten. "Not surprisingly," says NCUA, "such 'high OTD' lenders had little incentive to ensure that these loans were sound, as they would not be keeping them for long, but rather, would sell them immediately to Wall Street, which would in turn securitize them for sale to investors-thereby shifting like a hot potato the risk of default from the lenders to (residential) MBS investors."
"Originators began to make loans to home buyers only to re-sell those loans to Wall Street banks, which made them more likely to disregard underwriting standards because they faced no risk if borrowers could not repay the loans," argues NCUA, which said several courts have ruled that just a few of these factual allegations are sufficient to survive a motion to dismiss.
Throughout the numerous suits brought by NCUA the regulator has been careful not to allege fraud because the standards in proving fraud are much higher than simple misrepresentation. Lawyers for RBS did not return to phone calls seeking comment. NCUA says it does not comment on pending litigation.
NAFCU'S CHIEF ECONOMIST, TUN WAI, TO RETIRE SOON
ARLINGTON, Va.-NAFCU announced that Dr. Tun Wai is retiring as its chief economist next month, after 25 years with the association. Wai, who holds a Ph.D. in economics from Georgetown University and an MBA in finance from New York University, was one of the few industry leaders who spoke candidly about the looming corporate credit union crisis and its eventual costs. He is one of the few experts on arcane credit union matters, such as the National CU Share Insurance Fund, accounting for credit unions and credit union financial data.
During his time at NAFCU Wai created the CU Economics Group, and led the NAFCU Board's annual visits to the Federal Reserve. He is also responsible for the creation of NAFCU's research publications and its economic forecasts.
He joined NAFCU in 1987 after stints at the World Bank, the Federal Reserve and the Brookings Institution. Wai plans to travel extensively in his retirement.
