A federal court in New York yesterday ordered Standard & Poor’s to produce all records related to $72 million of failed mortgage-backed securities CUNA Mutual Group bought from RBS Securities and any documents that may show the Wall Street investment bank’s alleged efforts to coerce or pressure the rating agency into providing high ratings on the doomed MBS.
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Yesterday’s ruling by the U.S. District Court for the Southern District of New York resolves a motion to compel filed by CUNA Mutual, which is trying to force RBS to buy back the failed bonds it sold to its CMFG life Insurance Co., CUMIS Insurance Society and MEMBERS Life Insurance Co. subsidiaries.
The credit union insurer had filed a similar motion to compel against Fitch Ratings that also resulted in the production of volumes of records related to the failed investments, and Watterson Prime LLC, one of the firms that provided corroboration that mortgages packed into the mortgage-backed securities and sold by RBS Securities to CUNA Mutual followed preapproved guidelines for assets to be included in the mortgage bonds.
Yesterday's order, signed by Judge Naomi Reice Buchwald, will require S&P to hand over all documents contained in its electronic “dead files” for each of the 11 MBS certificates sold to the CMG subsidiaries and rated by S&P; and all documents reflecting any efforts by RBS "to coerce or pressure S&P with respect to RBS deals and all documents reflecting S&P’s response to such coercion or pressure."
RBS, which was nationalized by the British government after its 2007 failure, is also being sued by NCUA for billions of dollars in faulty MBS it sold to WesCorp and U.S. Central FCU.
CUNA Mutual filed suit last year in the U.S. District Court for the Western District of Wisconsin, claiming the Wall Street bank packed the MBS with subprime mortgage loans originated by five lenders that have since filed for bankruptcy and inflated the value of the mortgages in order to sell them to investors. The lenders, all of whom have filed Chapter 11 bankruptcy over the past few years, are Washington Mutual, First Magnus Financial Corp., Delta Funding, New Century Mortgage Corp. and Fremont Investment & Loan.
In its suit, CUNA Mutual claims the bankrupt lenders made misrepresentations to RBS about the loan underwriting standards and the nature of the collateral backing the loans, which the Wall Street bank is adjudicating on its own with the remnants of those lenders. Those misrepresentations led RBS to misstate the value of the MBS, which were based on erroneous loan-to-value ratios and owner-occupancy ratios, among other things, according to CUNA Mutual, which is seeking to exercise the rescission clause in the sale of the MBS.
CUNA Mutual, which bought the securities for its MEMBER’s Life and CUMIS Insurance subsidiaries between 2004 to 2007, said after the MBS began to go sour it hired a forensic auditor who reviewed 17,949 loans, or 40% of the total number of loans in the MBS, and discovered, among other things, that the Wall Street bank vastly understated both the LTV and the combined LTV for each of the securities, and significantly overstated the owner-occupancy ratio for the pools of loans, a key indicator of the rate at which the loans will be repaid. Those figures, claims CUNA Mutual, caused the rating agencies to overstate the credit ratings on the bonds, which helped convince CUNA Mutual’s subsidiaries to buy the securities.
RBS said CUNA Mutual bought the securities knowing they were rated borderline speculative by ratings agencies and that the representations being cited in the suit were made either by originators, borrowers, the ratings agencies, or the appraisers.
