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Barclays Wins Mortgage-Backed Security Ruling

(CN) - Barclays Bank did not commit fraud when it sold $60 million in mortgage-backed securities through pools containing delinquent loans, the 5th Circuit ruled.

The New Orleans court dismissed a securities fraud action against the bank, saying it never promised that the mortgage pools were free of delinquent loans.

Barclays sold two sets of residential mortgage-backed securities to Lone Star Fund V LP in May and June 2007 through two trusts, one for $45 million and one for $16 million, which covered more than 10,000 home mortgages.

In November 2007, Barclays admitted 144 mortgages were delinquent and "promptly substituted" new mortgages. Lone Star then found that 848 loans in $45 million trust were delinquent at the time of purchase.

The district court dismissed Lone Star's suit for failure to state a claim, and a three-judge panel of the 5th Circuit affirmed.

The "repurchase or substitute" clauses in the mortgage-backed securities contracts covered Barclays, the appeals court ruled.

The "no delinquency" provisions that Lone Star cited in the lawsuit are "isolated portions of complex contractual documents," Judge Edith Jones wrote.

"Appellants' efforts to focus on a single representation amid hundreds of pages of contractual documents are misplaced. They are bound by the entirety of the contract," Jones wrote.

The warranties on the securities say the mortgages should not be delinquent, Jones wrote, but if they were, Barclays would repurchase them or replace them with performing mortgages.

Barclays even demonstrated that it stuck to the provision when it replaced the 144 delinquent mortgages in November 2007, the opinion states.

"Lone Star does not and cannot allege that Barclays breached its duty to remediate the mortgage pools," Jones wrote.

The ruling prevents banks from facing liability resulting from the difficulty investigating underlying residential mortgages, Jones said.

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