‘About That $19 Billion …’

     SAN FRANCISCO (CN) – The Federal Home Loan Bank of San Francisco demands $19 billion from major banks and investment houses it accuses of lying about the quality of the subprime mortgage-backed securities they created and sold. The FHLB sued Deutsche Bank, Credit Suisse, J.P. Morgan, Morgan Stanley, UBS, Banc of America, Countrywide Financial and others in two Superior Court complaints.

     The FHLB claims the lending giants, including now-defunct Bear Stearns, Greenwich Capital Markets, RBS Securities and others failed to disclose material facts about the mortgages, such as how much equity the borrowers had in their homes, and that the omissions and misrepresentation led to much greater rates of foreclosures than promised.
     The firms used exaggerated property appraisals so the loan-to-value ratios of the mortgage loans in the securities’ collateral pools understated the risks, according to the complaint.
     “(T)he differences between the values ascribed to these properties and the prices at which the properties were sold in foreclosure are significantly greater than the declines in house prices in the same geographical areas over the same periods,” the FHLB says.
     In addition, the number of borrowers who actually lived in the houses was lower than the defendants represented, and the borrowers’ credit scores were lower too, the FHLB says.
     The lending giants did not tell the FHLB that their loan “originators were making frequent … exceptions to underwriting guidelines when no compensating factor was present,” and the originators systematically failed to detect or prevent borrower fraud, according to the complaints.
According to one complaint, “the Defendants sold or issued to the Bank 98 certificates in 80 securitization trusts backed by residential mortgage loans. The Bank paid more than $13.7 billion for those certificates. When they offered and then sold these certificates to the Bank, the defendants made numerous statements to the bank about the certificates and the credit quality of the mortgage loans that backed them. On information and belief many of those statements were untrue. Moreover, on information and belief the defendants omitted to state many material facts that were necessary in order to make their statements not misleading.”
The other complaint states: “the defendants sold or issued to the bank 36 certificates in 33 securitization trusts backed by residential mortgage loans. The bank paid more than $5.4 billion for those certificates. When they offered and then sold these certificates to the bank, the defendants made numerous statements to the bank about the certificates and the credit quality of the mortgage loans that backed them. On information and belief, many of those statements were untrue.”
The FHLB would like its $19.1 billion back. Its lead counsel is Robert Goodin with Goodin, MacBride, Squeri, Day & Lamprey.

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