While we wait for more settlements in the Libor case, banks continue to face exposure for their fraudulent mortgage conduct dating back to the housing bubble. Two more major lawsuits emerged yesterday.
DZ Bank, a cooperative from Germany, sued Bank of America over $546 million in mortgage backed securities. The same firm has sued Morgan Stanley, JPMorgan Chase, HSBC, UBS and Goldman Sachs over the purchase of MBS. They are clearly positioning themselves in the event of a major breakthrough in these cases, like the FHFA’s lawsuit against these banks and more, and they represent just one of the guppies that would benefit from a win by the big fish. It’s symptomatic of how the smaller investors will surely come running if they see a way to recoup their losses based on fraudulent underwriting in the mortgage pools.
The bigger lawsuit concerns the National Credit Union Administration, a government regulator.
The National Credit Union Administration has sued a JPMorgan Chase (JPM) unit claiming Bear Stearns & Co., which it acquired in 2008, used misleading documents in selling $3.6 billion in mortgage-backed securities to four corporate credit unions that later failed.
The documents said the mortgage originators had adhered to underwriting guidelines that had been “systematically abandoned,” the credit union agency said in a federal court lawsuit filed Dec. 14 in Kansas City, Kan.
“Because the mortgages in the pools collateralizing the [residential mortgage-backed securities] were largely underwritten without adherence to the underwriting standards in the offering statements, the RMBS were significantly riskier than represented,” the NCUA said in its complaint.
NCUA has also filed suit against Barclays Bank, Credit Suisse, Goldman Sachs, Royal Bank of Scotland and the Wachovia unit of Wells Fargo. Several of them ended up settling in “neither admit nor deny wrongdoing” resolutions, but the JPMorgan case is bigger.
Basically, these misrepresentation suits, which have been floating around the courts for years, are all starting to come to a head. The pinpricks from the New York Attorney General’s office or the US Attorney for the Southern District of New York aren’t all that edifying. But the FHFA lawsuit is important, and we’re finally seeing some serious pile-on as they win elements of the case in court. This month, the FHFA won a key sampling ruling that allows them to use statistical models for the 1.1 million mortgages at issue in the case.
The exposure remains, in other words, and as soon as one of these cases breaks through and shows guilt on the part of a mortgage backed securities issuer, the dam will burst.