Ameriquest Sued For Possible Loan Misrepresentation

Ellington Management Group and six of its hedge funds sued Ameriquest Mortgage Co. and several subsidiaries for allegedly misrepresenting the loans backing securities the fund manager bought for $354 million from 2005 to 2007. The bonds Ellington purchased, which are known as "net interest margin" securities, are extremely risky by nature. They generally only pay out if, near the end of the terms of the deal, reserves set aside to absorb losses on all of the other tranches have not been exhausted. But Ellington alleges in a complaint filed in the U.S. District Court for the Southern District of New York last week that a large number of loans backing these securities failed to meet Ameriquest's own stated underwriting criteria, as described in the prospectus and in other places. As a result, the income streams from the securities were not what Ellington expected. The complaint says Ellington asked Ameriquest to provide loan samples in 2007, after a high number of mortgages backing the securities defaulted. The fund manager said its analysis revealed that a large percentage of these defaulted loans violated Ameriquest's underwriting guidelines. Additionally, Ellington's analysis showed that many of the underlying loans broke laws against predatory or high-cost lending by, for example, violating "borrower's bill of rights" laws, charging exorbitant fees or failing to give proper disclosures and notices. Ellington alleges that internal documentation in Ameriquest's possession at the time it created the securities showed the deficiencies, which "were so apparent that they would have been readily discovered had the mortgage company defendants conducted even a minimal compliance review."