Credit Unions Blame Banks for $2.7B Fiasco

KANSAS CITY, Kan. (CN) - The nation's largest corporate credit union was forced into involuntary liquidation after being stuck with more than $2.7 billion in residential mortgage-backed securities, the National Credit Union Administration Board claims.

RBS Securities and JPMorgan Securities are lead defendants in two massive federal complaints.

The National Credit Union Administration Board sued as liquidating agent of the U.S. Central Federal Credit Union, which at the time of accepting the securities was the largest corporate credit union in the country.

In its complaint against lead defendant JP Morgan, the Board also sued on behalf of the Western Corporate Federal Credit Union, United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union, all of which were forced into liquidation when the securities tanked.

The credit unions bought more than $2.735 billion of the securities, many of which the board says were artificially inflated to have a "triple-A" rating.

"The offering documents represented that the originators adhered to the underwriting guidelines set out in the offering documents for the mortgages in the pools collateralizing the RMBS [residential mortgage-backed securities]," the complaint against lead defendant RBS Securities fka Greenwich Capital Markets states.

"In fact, the originators had systematically abandoned the stated underwriting guidelines in the offering documents. Because the mortgages in the pools collateralizing the RMBS were largely underwritten without adherence to the underwriting standards in the offering documents, the RMBS were significantly riskier than represented in the offering documents. Indeed, a material percentage of the borrowers whose mortgages comprised the RMBS were all but certain to become delinquent or default shortly after origination."

The Board says it found patterns in the failed RMBS: a surge in borrower delinquencies and defaults on the mortgages in the pools, actual losses to the underlying mortgage pools within the first 12 months after the offerings exceeded expected losses, and a high percentage of the underlying mortgage loans were originated for distribution.

"The surge in delinquencies and defaults following the offerings evidences the systematic flaws in the originators' underwriting process," the complaint states.

The Board seeks damages for Securities Act violations.

Any recovery will reduce the total losses from U.S. Central, the complaint states.

Named as defendants in the RBS case are RBS Securities fka Greenwich Capital Acceptance, Financial Asset Securities, Fremont Mortgage Securities, Residential Funding Mortgage Securities II, Indymac MBS, Novastar Mortgage Funding, Nomura Home Equity Loan, Lares Asset Securitization, Saxon Asset Securities, and Wachovia Mortgage Loan and Trust.

Defendants in the other case are JP Morgan Securities, JP Morgan Acceptance Corp., American Home Mortgage Assets, Indymac MBS, and Bond Securitization LLC.

The National Credit Union Administration Board is represented by Norman Siegel with Stueve Siegel Hanson of Kansas City, Mo.

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