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Sunday, June 16, 2024 | Back issues
Courthouse News Service Courthouse News Service

Funds Blame Wells Fargo for Bad-Loan Losses

SAN FRANCISCO (CN) - Wells Fargo has blown billions of investor dollars by ignoring problems with bad loans that went into mortgage-backed securities, BlackRock and other huge financial services firms claim in state court.

PIMCO, Prudential Insurance, TIAA-CREF, Group Alliance, Kore Advisors, Sealink Funding and DZ Bank joined BlackRock in class action filed Monday against Wells Fargo in San Francisco Superior Court.

Wells Fargo was supposed to look out for the interests of the investors in more than 250 residential mortgage-backed securities trusts for which it acted as trustee, but the mutual fund groups say the bank failed to react to "overwhelming evidence of defective loans."

"This class action seeks to recover billions of dollars in damages caused by Wells Fargo's abdication of responsibility causing the beneficiaries of the trusts to lose billions of dollars," the companies say in the complaint.

Between 2004 and 2008, the mutual funds claim they invested $241.6 billion in 267 mortgage-backed securities trusts overseen by Wells Fargo.

While Wells Fargo has played a role in all parts of the mortgage-backed securities market, the lawsuit focuses on its role as a trustee.

To create mortgage-backed securities, banks originate loans or purchase them from other originators. They then pool them together and package those pools into securities. Investors in the securities receive some of the principal and interest payments made by mortgage borrowers.

BlackRock says that because the risk that borrowers miss payments or default is "passed through" to the investors in mortgage-backed securities, "the large investment banks and other players in the mortgage securitization industry have no 'skin' in the game once the [securities] are sold to holders," according to the complaint.

Once a mortgage-backed security is created, the trustee is responsible to protect the investors by monitoring the underlying mortgage loans, the mutual funds say.

Since investors are not privy to information about the individual loans, they say it has been Wells Fargo's job to tell them whenever it learned that a loan was the result of predatory lending or a misrepresented application.

"Instead, to protect its own business interest, Wells Fargo ignored pervasive and systemic deficiencies in the underlying loan pools and the servicing of those loans and unreasonably refused to take any action," the funds say in their complaint.

"Specifically, Wells Fargo knew that the pools of loans backing the trusts were filled with defective mortgage loans in breach of seller representations and warranties, including those representations and warranties regarding the originators' compliance with underwriting standards and practices, owner occupancy statistics, appraisal procedures, loan-to-value and combined loan-to-value ratios."

By 2009, they say Wells Fargo knew that the trusts had lost $7.9 billion and that one of every four underlying loans was delinquent. A year later, the losses were $18.8 billion, they say.

The 84-page complaint, filed by Blair Nicholas of Bernstein Litowitz Berger & Grossman, cites breach of contract and breach of fiduciary duty claims based on alleged violations of the pooling and servicing agreements that govern the trusts.

The trusts now have so many bad loans that they have "experienced enormous delinquency rates, collateral write-downs, and losses," the funds say in their complaint, adding that exact damages can only be determined through expert testimony at trial.

Bernstein Litowitz attorney Benjamin Galdstone declined to comment on the case.

A Wells Fargo spokeswoman told Courthouse News, "This is a re-filing of claims that were filed in New York and dismissed. We continue to believe the claims are without merit."

The complaint mentions in a footnote that the mutual funds filed suit in state court in New York in 2014, and moved it to Federal Court in New York later that year.

Earlier this year, U.S. District Judge Richard Berman declined to exercise supplemental jurisdiction over the mutual funds' state-law claims - leading to the present lawsuit, according to the complaint.

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