With its lawsuits hanging by a thread, National Credit Union Administration (NCUA) urged separate federal courts here and in Kansas Friday to allow it to advance its claims and make its case against Wall Street banks who sold faulty MBS that caused the failure of five corporate credit unions.
“Virtually every court addressing claims concerning similar [residential mortgage backed securities] offerings has denied motions to dismiss – 16 in all,” said NCUA in separate filings arguing against dismissal of suits the regulator has filed against Goldman Sachs and RBS Securities.
“All of these cases recognized the basic principle that, when originators have abandoned the underwriting standards that [they] professed to follow and ignored whether borrowers ever would be able to repay their loans,” said NCUA, “that abandonment is a material fact about any securities backed by those loans.”
The filings come as the U.S. District Court for the Central District of Los Angeles has issued a preliminary ruling for dismissal of another suit NCUA brought against RBS. The preliminary ruling states that NCUA has not made its case that the suit should go to trial. A final ruling is expected any day.
NCUA has filed five separate suits – including two against RBS and one against JPMorgan Chase and Wells Fargo’s Wachovia Securities unit – claiming the Wall Street banks violated their own underwriting standards when they packaged subprime loans from dozens of lenders and sold them as triple-A MBS to unwitting investors, including the five corporate failures.
“Nearly every court to consider the issue has agreed allegations that the originators for the loans backing [residential mortgage backed securities] engaged in ‘wholesale abandonment of [their] underwriting standards’ are sufficient to state a claim under the 1933 [Securities Exchange] Act,” NCUA argued in its efforts to dissuade a federal court in Kansas from dismissing its claims against RBS for the sale of MBS to U.S. Central Federal Credit Union and WesCorp Federal Credit Union.
NCUA told the two courts the Wall Street banks will have ample opportunity to prove they did not abandon their underwriting standards if the suits are allowed to proceed to the discovery stage, something many other investors are hoping in order to prove similar claims.
The stakes in the suits are enormous as NCUA, which expects to pay as much as $16 billion to resolve the corporate failures, is seeking to recover some $2 billion from the Wall Street banks, which would be used to offset the ultimate losses.
But suits from numerous investors, including Fannie Mae, Freddie Mac and several Federal Home Loan Banks, also may rely on these decisions.
NCUA’s central allegation in the five suits is the mortgage originators systematically disregarded the underwriting guidelines stated in the offering documents. That systematic disregard rendered the description of the underwriting guidelines in the offering prospectuses, along with related statements, “false and misleading” the regulator contends.
The Wall Street banks, according to NCUA, represented the loan originators were following their underwriting standards to provide investors with reasonable assurance that the underlying loans would be repaid.
But the mortgages underlying the MBS went bad at alarming rates, according to NCUA. In the case of Goldman Sachs’ sale of $491 million of MBS to WesCorp and U.S. Central, loans included in the securities went bad almost immediately en masse, according to NCUA. The loans underlying the MBS experienced high delinquency and default rates soon after purchase – up to 5.21% within the first three months, up to 14.81% at six months, and up to 34.09% at one year, according to NCUA.
The originators of the loans involved in the MBS were some of the biggest subprime lenders, many of them which have gone bankrupt over the past few years. Among them were Fremont Mortgage, Long Beach Securities, American Home Mortgage, IndyMac, Greenwich Capital, Nomura Asset, Residential Funding Mortgage, Novastar and Saxon Asset. Those lenders are named as co-defendants by NCUA.
“The massive failure of originators to adhere to their underwriting standards in the residential mortgage industry as a whole was hidden from view for many years,” said NCUA in its filings. “It was so well concealed that the credit rating agencies – experts in this industry – continued to award Triple A ratings to these RMBS securities well into 2007. By mid- to late 2008, however, this failing became a significant topic of public concern.”