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Government Announces Mortgage Securities Actions

RMBS, CDOs at issue

Aug. 6, 2013

By Mortgage Daily staff

U.S. government agencies have announced multiple actions against issuers of mortgage securities that allegedly violated federal securities laws.

A lawsuit was filed in U.S. District Court for the Western District of North Carolina by the Department of Justice against Bank of America Corp.

Also named as defendants are BofA affiliates Merrill Lynch, Pierce, Fenner & Smith f/k/a/ Banc of America Securities LLC; Bank of America, N.A.; and Banc of America Mortgages Securities Inc.

BofA allegedly lied about the risk level of loans backing $850 million in residential mortgage-backed securities.

The transaction, known as BOAMS 2008-A, has suffered nearly $70 million in losses. Another $50 million in losses is projected.

The government also accuses the defendants of making false statements after they didn't perform the proper due diligence on the RMBS and with loading up the securities with a disproportionate amount of risky mortgages originated through third party mortgage brokers.

A material number of loans in the deal didn't comply with BofA's underwriting standards, according to the government. In addition, the lack of due diligence promised by BofA allowed loans into the securitization with overstated income, fake employment and inflated appraisals. Loan-to-value ratios exceeded acceptable levels, and occupancy was misrepresented.

Attorney General Eric Holder said in the announcement that a range of additional investigations are being pursued.

"Bank of America's reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors," U.S. Attorney Anne M. Tompkins said in the news release. "Now, Bank of America will have to face the consequences of its actions."

Civil penalties are sought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The Securities and Exchange Commission -- which filed a parallel action in the same court -- issued a news release indicating that BofA, "in its own words," shifted the risk of loss to unsuspecting investors.

The SEC accuses BofA of violating the Securities Act of 1933.

In another action, the SEC said that UBS Securities has agreed to a $50 million settlement over allegations it violated the Securities Act of 1933 and caused the violation of the Investment Advisers Act of 1940.

The UBS case involves a collateralized debt obligation known as ACA ABS 2007-2. The collateral for the deal was subprime RMBS.

"The SEC’s investigation found that UBS received $23.6 million in upfront payments in the process of acquiring credit default swaps as collateral," the SEC's statement said. "Rather than transferring this cash to the CDO when the collateral was transferred, UBS retained the full amount of upfront payments in addition to its disclosed fee of $10.8 million.

"Not only did UBS go on to market the deal using materials that omitted any reference to its retention of the upfront payments, but the materials inaccurately represented that the CDO had to acquire all collateral at either fair market value or the price it was acquired by UBS."

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