The Federal Housing Finance Agency (FHFA) on Wednesday filed suit against UBS Americas for misrepresenting the quality of private label, non prime MBS it sold to Fannie Mae and Freddie Mac during the housing and mortgage boom.
The GSE regulator is seeking to recover losses that Fannie and Freddie suffered when they bought $4.5 billion of PLS through UBS Americas, which underwrote the MBS. The lawsuit is the first to result from investigations FHFA launched last July. Additional civil actions against other Wall Street firms that sold nonprime MBS to the two GSEs are expected.
“FHFA is taking this action consistent with our responsibilities as conservator of each Enterprise,” FHFA acting director Edward DeMarco said. “From the issuance of 64 subpoenas last year to the filing of this lawsuit and further actions to come, we continue to seek redress for the losses suffered by the Enterprises.”
The defendants named in the lawsuit include UBS Americas, UBS Real Estate Securities, UBS Securities, Mortgage Asset Securitization Transactions, and former UBS executives David Martin, Per Dyrvick, Hugh Corcoran, and Peter Slagowitz.
The two GSEs claim they lost more than 20% on their investment in UBS private-label securities.
The lawsuit claims the MBS registration statements contained "material misstatements" about creditworthiness of the borrowers.
"Forensic reviews of several hundred loans files has revealed numerous instances in which there was a failure during the underwriting process to confirm the reasonableness of the borrower's stated income or to correctly account for the borrower's debt," the lawsuit said.
At press time a UBS spokesman would only say that, “We are reviewing today's complaint and intend to defend ourselves vigorously against it in court.”
As of March 31, Fannie had $39.6 billion in private-label securities on its books and Freddie had $53.3 billion.
The GSEs supplied liquidity to the nonprime market during the housing boom by purchasing PLS deals from several top ranked Street firms.