WICHITA, Kan. (1/27/12)--JP Morgan Chase--one of the Wall Street entities sued by the National Credit Union Administration (NCUA) for allegedly misrepresenting the risks involved in mortgage-backed securities sold to four corporate credit unions--has filed its response to NCUA's complaint in a federal court.
NCUA filed the suit in U.S. District Court for the District of Kansas, Wichita, against JP Morgan Securities LLC; JP Morgan Acceptance Corp. I, American Home Mortgage Assets LLC; IndyMac MBS Inc., and Bond Securitization LLC.
In the suit, NCUA, liquidating agent for four corporates, alleges the entities misrepresented the risks when they sold MBSs to Western Corporate FCU (WesCorp), U.S. Central FCU, Members United Corporate FCU and Southwest Corporate FCU, and that those MBSs were instrumental in the failure of four corporates, according to court documents.
In its motion to dismiss the case, filed Wednesday, JP Morgan asserts that NCUA:
- Was not specific enough in terms of specific loans and certificates purchased to demonstrate that JP Morgan made material misrepresentations in selling them.
- Failed to prove that the investment originators "systematically disregarded" their underwriting guidelines in making the loans. JP Morgan noted that NCUA relied heavily on post-purchase loan performance statistics to argue that point and that most allegations refer to relaxation of underwriting standards, not the abandonment or systemic disregard of the standards in place.
- Labeled as irrelevant the offering documents that "explicitly disclosed the risks associated with reduced documentation loans."
- Was wrong in asserting that loan-to-value ratios were held out to investors as reasonable measures to ensure borrowers would pay. JP Morgan said the ratios "might not be a reliable indicator of rates of delinquencies, foreclosures and losses that could occur."
- Failed to plead a complete abandonment of underwriting related to general loosening of standards. "The (NCUA) board has admitted that credit unions should have understood those risks as early as 2005…Thus, although the board now contends that 'public information was not sufficiently material to dissuade a reasonable investor from purchasing the certificates,' it took exactly the opposite position when it sued the WesCorp directors for ignoring the disclosed risks. It is beyond dispute that the credit unions knew or should have known about the risks associated with loans at issue. Additional disclaimers could not have 'significantly altered' the mix of available information. "
JP Morgan also argued that the statute of limitations was past and thus barred NCUA's claims. It noted "sufficient storm warnings to alert a reasonable person to the possibility" of misrepresentations were made by no later than February 2007. The warnings included "public disclosures of the same general mortgage loan origination allegations upon which the board now relies," warnings from NCUA to credit unions regarding the potential for inflated appraisals and the risks of liberalized underwriting practices, and monthly trustee reports and data that indicated spikes in delinquencies and defaults.
"That information put the credit unions on inquiry notice by February 2007 (at the latest) of the very facts the board now asserts in its complaint." NCUA's claims "would be time barred because credit unions had actual knowledge of the facts alleged in the complaint before February 2007," JP Morgan said in its motion to dismiss the case.