Wells Fargo, the successor to Wachovia Capital Markets, told a federal court in Wichita, Kan. Friday it should dismiss National Credit Union Administration's (NCUA) suit over MBS Wachovia sold via offering prospectuses.

In a motion to dismiss filed in U.S. District Court, Wells, which bought Wachovia in 2009, said the two corporate giants were well aware that the mortgage underlying $200 million in MBS were subprime loans and of dubious value. Wells notes that in a 2006 prospectus registered with the Securities and Exchange Commission it explained that 73% of the mortgages in the MBS were so-called reduced documentation or “no doc” loans for which the borrower was not required to submit proof of his or her income, assets, or both.

“In addition to significant, detailed risk disclosures, the (prospectus) expressly provides that “exceptions to the underwriting standards are permitted where compensating factors are present,” the motion to dismiss stated.

Further, the prospectus revealed that most of the loans in the pools would not meet the requirements of Fannie Mae and Freddie Mac; and that the mortgage loans were likely to experience rates of delinquency, foreclosure and bankruptcy that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten to Fannie Mae and Freddie Mac conforming guidelines.”

But what is increasing interesting about the Wachovia case and similar NCUA suits against Goldman Sachs, JPMorgan Chase and RBS Securities, is the blurring of lines between the mortgage originators and the Wall Street underwriters who packaged the loans into securities.

In this case, for example, the loans were originated by a variety of subprime lenders, including Wachovia Bank, then packaged into MBS and sold to investors by Wachovia Securities. In other cases, Goldman Sachs packaged the mortgages originated by its GS Mortgage subsidiary; and JPMorgan Chase Securities for mortgages made by Chase Bank.

The Wall Street banks argue in their defense they are not responsible for the quality of the loans made by, in essence their own subsidiaries. And NCUA has not disputed this argument.

The Wachovia suit is filed in the U.S. District Court for the District of Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central, the one-time $52 billion central bank for credit unions.

NCUA as liquidating agent for WesCorp Federal Credit Union, U.S. Central Federal Credit Union and three other corporate credit unions, has filed five different suits against Wall Street banks seeking reimbursement for billions of dollars in losses accrued on the MBS. Any recoveries would be used to offset losses on the corporate failures, which are estimated to be at least $16 billion, with losses to WesCorp and U.S. Central projected to be $12 billion.

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