JUL 26, 2013 10:59am ET

UBS to Pay $885M to Settle U.S. Mortgage Bonds Suit

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UBS AG, Switzerland’s largest bank, agreed to pay $885 million to Fannie Mae and Freddie Mac to settle claims that it improperly sold them mortgage-backed securities during the housing bubble, a U.S. regulator said.

The Federal Housing Finance Agency claimed Zurich-based UBS misrepresented the quality of loans underlying billions of dollars in residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac. The firms have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

UBS disclosed earlier this week that it had reached an agreement in principle to settle the suit. The FHFA sued UBS in 2011 over $4.5 billion in residential mortgage-backed securities that UBS sponsored and $1.8 billion of third-party RMBS sold to Fannie Mae and Freddie Mac. The suits alleged losses of at least $1.2 billion plus interest. Fifteen other banks still need to resolve such lawsuits.

“The satisfactory resolution of this matter provides greater clarity and certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae’s and Freddie Mac’s assets on behalf of taxpayers,” acting director Edward J. DeMarco said in an emailed statement.

FHFA sued UBS and 17 other banks in 2011, seeking to recover losses on a total of $200 billion in mortgage-backed securities sold to the two government-sponsored enterprises.

UBS is the third bank to reach an agreement with FHFA. Citigroup Inc. and General Electric Co. both paid undisclosed amounts to settle the regulator’s claims.

“UBS was fully provisioned for this settlement, which was in the best interests of our clients and shareholders,” said Karina Byrne, a spokeswoman for UBS Americas. Byrne said the settlement gives UBS full release from other potential claims in connection with residential mortgage-backed securities.

The bank said this week it’s booking 865 million francs in charges, provisions and writedowns in the second quarter related to the settlement and a Swiss-U.K. tax agreement. UBS’s net income rose to about 690 million francs in the quarter from 524 million francs a year earlier, beating analysts’ estimates. The company publishes full quarterly results on July 30.

UBS is seeking to resolve various legal matters as CEO Sergio Ermotti scales down the investment bank to focus on money management. The bank was fined about 1.4 billion francs in December by regulators in the U.S., U.K. and Switzerland for altering its submissions used to set benchmarks such as the London interbank offered rate.

Credit Suisse Group AG, Switzerland’s second-biggest bank, said yesterday it’s “adequately positioned” with regards to a possible settlement tied to U.S. mortgage-backed bond sales. The bank sold $14.1 billion in securities to the housing agencies, according to the FHFA’s 2011 lawsuit.

CEO Brady Dougan said the performance of bonds sold to Fannie Mae and Freddie Mac should be considered, not just the notional amounts that were sold. To date, losses on the portfolio that Credit Suisse sold were about $100 million, he said.

“We feel like in our mortgage business we actually cut back originations quite substantially in 2006,” as the rest of the industry was still growing, Dougan told analysts on a conference call yesterday. “We were very rigorous around due diligence processes, etc., so we think that that is reflected actually in better performance of the portfolios.”

In November, U.S. District Judge Denise Cote, who is overseeing the UBS suit and most of the other FHFA suits, denied a request by Citigroup, Bank of America Corp. and two other banks to dismiss them.

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