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Massive Wave of MBS Litigation Hits

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Investors in residential mortgage-backed securities have been on a litigation binge accusing banks, trustees and other parties of putting them in sour investments. But the defendants claim that it was not them — but the floundering economy and ailing housing market that impaired the investments.

On Monday, Talcott Franklin P.C. announced that it has been retained by “large” RMBS investors to force Option One Mortgage Corp. to repurchase “improperly originated or documented” loans that violated representations and warranties. The investors reportedly hold more than 25 percent of the voting rights in at least 64 Option One trusts.

Dallas-based Talcott, which in July 2010 claimed that it represented investors on more than $500 billion in RMBS, said it expects that damages will exceed available MBS assets and urged investors to quickly submit voting rights.

A complaint was filed on April 20 by the Federal Home Loan Bank of Boston in the Superior Court Department Business Litigation Session of the Commonwealth of Massachusetts in Suffolk County, according to a statement from the government-sponsored enterprise. Name as defendants in the lawsuit are securities dealers, underwriters, control persons, issuers/depositors and credit rating agencies on $5.8 billion in private-label MBS issued by 115 securitization trusts.

The FHLB claims that the defendants misled it about the MBS and seeks “various forms of relief including rescission, recovery of damages, recovery of purchase consideration plus interest (less income received to date) and recovery of reasonable attorneys’ fees and costs of suit.”

In an SEC filing last week, Citigroup Inc. acknowledged that it is one of the defendants named in the FHLB’s lawsuit. In addition, Citi faces subprime counterparty lawsuits by Union Central Life Insurance Co., Ameritas Life Insurance Corp. and Acacia Life Insurance Co.

Also acknowledging its inclusion as a defendant in the FHLB case in an SEC filing was Bank of America Corp. BofA’s filing additionally indicated that Ally Financial Inc. is a defendant in the case.

A court filing by bond insurer MBIA Inc. in a lawsuit against Credit Suisse Group AG indicated that the Securities and Exchange Commission has subpoenaed Credit Suisse for information on a $900 million pool of mortgages, the Wall Street Journal reported. MBIA has also reportedly been subpoenaed.

Published reports indicate that JPMorgan Chase & Co. has also been subpoenaed for information tied to Bear Stearns securities.

On its Web site, MBIA said it also has lawsuits pending against Bank of America Corp. and affiliated companies; Countrywide Financial Corp. and affiliates; Merrill Lynch Pierce, Fenner and Smith Inc. and affiliated companies; Residential Funding Company LLC; IndyMac ABS Inc.; the Federal Deposit Insurance Corp. (in its corporate capacity and as conservator and receiver of Indymac Federal Bank, FSB; DLJ Mortgage Capital Inc.; Select Portfolio Servicing Inc.; Morgan Stanley and affiliated companies, Saxon Mortgage Services Inc., Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., The Bank Of New York Mellon Trust Co., N.A., As Trustee Under an Indenture dated November 23, 2004; Paragon CDO, Limited; and Royal Bank of Canada and affiliates.

MBIA reported in March that it reached agreements with five counterparties during the fourth quarter to eliminate $15.7 billion in gross insured exposures. First-quarter commutations amounted to $3.3 billion. The agreements impact coverage on CDOs and CMBS.

“Since the fourth quarter of 2008, the company has commuted $28.0 billion of its multi-sector CDO, multi-sector CDO-squared, CRE CDO, CMBS pool and corporate CDO gross insured exposure for payments that were within its aggregate statutory loss reserves for those transactions,” MBIA stated. “In consideration for the commutation of insured transactions, including the transactions described above, the Company has made and may in the future make payments to the counterparties the amounts of which, if any, may be less than or greater than any statutory loss reserves established for the respective transactions.”

New York Supreme Court Justice Bernard J. Fried Monday ruled in MBIA’s 2008 lawsuit against Residential Funding that the insurer can seek subpoenas for out-of- state documents and, where necessary, testimony about borrowers’ income and employment, Bloomberg reported. MBIA reportedly hopes to prove that the lender “willfully disregarded its underwriting guidelines and misrepresented the quality of the mortgage loans.”

A motion to remand back to a state superior court was granted on May 2 by U.S. District Judge Jeffrey S. White in Charles Schwab Corp.’s lawsuit against J.P. Morgan Securities Inc. Schwab alleges in its lawsuit, which was originally filed in San Francisco County Superior Court, that JPMorgan subsidiary Bear Stearns & Co. Inc. — along with Bear Stearns Asset Backed Securities I LLC, Chase Mortgage Finance Corp., J.P. Morgan Acceptance Corporation I and J.P. Morgan Securities Holdings LLC — made “material misleading statements” about the quality of $486 million in certificates it acquired.

Among bankrupt lenders who originated many of the loans in the Bear transactions were Aegis Mortgage Corp., American Home Mortgage Holdings Inc., First Magnus Financial Corp., First NLC Financial Services LLC, HomeBanc Mortgage Corp., Lancaster Mortgage Bankers LLC and 1st Republic Mortgage Bankers Inc.

Schawb requested the remand based on the lack of “diversity that this action is not ‘related to’ bankruptcy proceedings, and on equitable grounds.” The case was remanded from the U.S. District Court for the Northern District of California back to the state court.

A federal judge granted the plaintiffs’ motion to file under seal materials in support of a motion for class certification in a case against Wells Fargo. The case, which is pending in U.S. District Court for the Northern District of California, was filed by lead plaintiffs Alameda County Employees’ Retirement Association, Government of Guam Retirement Fund, New Orleans Employees’ Retirement System and Louisiana Sheriffs’ Pension and Relief Fund.

A lawsuit filed by Thrivent Financial during March in Hennepin County District Court, Minn., was remanded to U.S. District Court last month, Twin Cities Business reported. The complaint claims that defendants Countrywide Financial Corp. and GMAC Mortgage didn’t follow underwriting guidelines on hundreds-of-millions of dollars in MBS in which it invested.

Bloomberg reported in April that BofA was released from a lawsuit filed in U.S. District Court for the Central District of California by the Maine State Retirement System against Countrywide. BofA successfully claimed that it cannot be held liable for the actions of a subsidiary.

Reuters reported that BofA, Countrywide and Mellon were sued by MBS investors on Feb. 23 in New York’s supreme court over $1.06 billion in repurchase demands. The investors, known collectively as Walnut Place, reportedly own 25 percent of the certificate balances and allege that loan-to-values exceeded 95 percent of the underlying properties.

An agreement reached on Oct. 18, 2010, between BAC Home Loans Servicing LP and RMBS investors was extended, according to an agreement announced by plaintiff’s counsel Gibbs & Bruns LLP. Also joining the agreement was trustee The Bank of New York Mellon. The Houston-based law firm said that the claims and defenses of all parties are preserved.

ICP Capital Management and Moore Capital were sued by American International Group Inc. in a New York state court over allegations they presented exotic collateralized-debt obligations as being backed by prime MBS, according to Property Casualty360. While AIG was reportedly prohibited by its agreements with the Federal Reserve from suing various banks, it can sue the managers who assembled the securities.

Assured Guaranty hopes to collect $100 million from its lawsuit against Flagstar Bancorp, Reuters reported. The complaint, filed in U.S. District Court for the Southern District of New York, alleges that Flagstar didn’t meet repurchase demands on securitized mortgage within the required time.

A class-action investor lawsuit filed in U.S. District Court for the District of Colorado against United Western executives and directors, auditors and investment advisors alleges that the company failed to disclose its impaired mortgage securities in a 2009 offering, Rigrodsky & Long, P.A., announced. United failed on Jan. 21, largely as a result of “multi-million dollar impairments in its investment securities portfolio.” The failure of the Denver-based bank was expected to cost the Deposit Insurance Fund more than $300 million.

Woodmen of the World sued US Bancorp on March 15 in Delaware Chancery Court over claims that the bank as trustee improperly invested in MBS and asset-backed commercial paper, Bloomberg reported. The insurer claims it lost more than $47 million because of US Bancorp.

Another insurer, Allstate, filed a lawsuit against Credit Suisse over being allegedly misled on $231 million in RMBS it purchased between 2005 and 2008, according to Bloomberg. Underwriting guidelines were allegedly abandoned on the loans backing the securities.

A month earlier, Allstate reportedly sued Citigroup and Deutsche Bank AG over allegedly being misled on more than $385 million in securities.

Federal Home Loan Bank of Boston v. Ally Financial Inc., et al.

April 20, 2011 (Massachusetts Superior Court, Suffolk County).

MBIA Insurance Corp. v. Residential Funding Company LLC.
Case No. 603552/2008 (New York state Supreme Court, Manhattan).

CHARLES SCHWAB CORPORATION, Plaintiff, v. J.P. MORGAN SECURITIES INC., f/k/a BEAR, STEARNS & CO, et al., Defendants.
Case No. C 10-04523 JSW, Sept. 2, 2010 (San Francisco County Superior Court).

Maine State Retirement System v. Countrywide Financial Corp.
Case No. 10-cv-00302 (U.S. District Court, Central District of California).

Assured Guaranty Municipal Corp Vs. Flagstar Bank et al.
Case No.11-2375 (U.S. District Court for the Southern District Court of New York.)

IN RE WELLS FARGO MORTGAGE-BACKED CERTIFICATES LITIGATION.
Civil Action No. 09-cv-01376-LHK (PSG) (U.S. District Court, N.D. California).

Woodmen of the World Life Insurance Society v. US Bancorp.
Case No. 6260-CC, March 15, 2011 (Delaware Chancery Court).

Allstate Insurance Co. v. Credit Suisse Securities (USA) LLC.
Case No. 650547/2011 (New York state Supreme Court, New York County).

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