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U.S. Agency Sues UBS Over Mortgage-Backed Securities Sold to Fannie and Freddie

Posted on 28 Jul 2011

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The Federal Housing Finance Agency is suing UBS AG over $4.5 billion in residential mortgage-backed securities sold to Fannie Mae and Freddie Mac. Regulators went to court for the first time to recoup losses caused by the investments. The agency claims the Swiss bank misstated the securities’ risks.

“Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the borrowers’ capacity to repay their mortgage loans,” the FHFA said in its complaint.

The litigation is the first of its type, said Stefanie Johnson, a spokeswoman for FHFA. The suit, which seeks unspecified damages, targets 16 securitizations sponsored by UBS between Sept. 28, 2005, and Aug. 30, 2007.

Allison Chin-Leong, a spokeswoman for Zurich-based UBS, didn’t immediately return a voice-mail message seeking comment on the suit.
FHFA previously resolved disputes over MBS without going to court.

Bank of America

In January, Bank of America Corp., the biggest U.S. lender by assets, paid $2.8 billion to Freddie Mac and Fannie Mae to settle demands the company buy back mortgages they said were based on faulty data. Ally Financial Inc. agreed at the same time to pay $500 million to end the claims it faced.

FHFA said a year ago it had issued 64 subpoenas seeking loan files and transaction documents as it tries to determine whether misrepresentations or omissions might require issuers to repurchase loans. The agency didn’t identify the companies that received the demands for information.

Fannie Mae and Freddie Mac, the largest sources of funding for U.S. residential mortgages, relied on so-called private-label debt backed by subprime loans to boost profit and help meet a federal mandate to promote homeownership. The federal government took control of the companies in 2008 after the collapse of the U.S. mortgage market pushed them toward insolvency. They have been sustained by a promise of unlimited Treasury Department aid that has yielded $145 billion for the companies so far.

Fannie Mae and Freddie Mac guaranteed 70 percent of the single-family mortgage-backed securities issued in 2010, according to an FHFA report to Congress this month.

Improved Underwriting

The agency said in the report that improved underwriting on the loans that the companies package into mortgage-backed securities helped reduce losses to $28 billion in 2010, from $93.6 billion a year earlier.

The acting director, Edward DeMarco, reported that the companies are still “critical supervisory concerns,” largely because of a backlog of bad loans originated from 2005 to 2007.