(CN) - A hedge fund can sue UBS Securities for allegedly underwriting $109 million in now-worthless residential mortgage-backed securities, a federal judge ruled.
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Capital Ventures International says it bought more than $109 million worth of residential mortgage-backed securities certificates from UBS Securities between 2004 and 2006.
Each certificate represents a pool of thousands of mortgages, and Capital Ventures allegedly replied on representations from UBS made in the offering materials about the quality of the loans that formed the security for the certificate.
Claiming that all of its certificates were downgraded to "junk" by at least one rating agency after the housing market collapsed, Capital Ventures filed suit against UBS.
It said the bank failed to abide by the underwriting standards described in the offering materials, alleging that UBS had inflated what percentage of the loans were backed by owner-occupied properties.
It also said that the loan-to-value ratios provided were misleading. And it claimed that the credit ratings agencies relied on false and misleading data in grading each certificate.
Though U.S. District Judge Denise Casper that ratings claim, she said the hedge fund can move forward with allegations regarding UBS's underwriting guidelines, owner-occupancy rates, and loan-to value ratios.
"Capital Ventures merely alleges that the rating agencies issued ratings 'based on the loan profiles fed to the agencies, which included false and misleading data regarding, among other things, the property's occupancy status and value, and regarding the underwriting processes applied to that loan,'" the 31-page decision states. "Therefore, Capital Ventures does not sufficiently allege that that the 'ratings' unqualified reproduction in the Offering [Materials] would constitute an actionable misrepresentation and omission.'"
As for the other claims, Casper noted that "that there was a general incentive in the mortgage securitization industry to abandon underwriting guidelines."
"A third party diligence firm, Clayton Holdings, Inc., reviewed the defendants' loan files for, among other things, 'adherence to seller-credit underwriting guidelines,' and found that 'a startlingly high percentage of loans reviewed ... were defective, but were nonetheless included by Defendants in loan pools sold to investors such as Capital Ventures,'" the judge added (ellipsis in original).
UBS cannot try to pin the blame on third parties.
"In light of the lack of specific disclosures regarding the risk of borrower misrepresentation and the allegation that the 'defendants . . . knew the borrowers were misrepresenting their intent to live at the property,' the court is persuaded that the defendants 'cannot simply claim that [they] blindly reported information given to [them] by third parties and thereby avoid liability for inaccuracies that made their way into the offering materials,'" she wrote.
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