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Wachovia court filing claims MBS risks were clear
KANSAS CITY, Kan. (4/11/12)--Wachovia Capital Markets filed a motion Friday in a federal court in Kansas to dismiss the National Credit Union Administration's (NCUA)  lawsuit to recoup losses from residential mortgage backed securities (RMBS) that corporate credit unions bought from Wachovia before the financial crisis.

In its motion to dismiss, filed in the U.S. District Court for the District of Kansas, Kansas City,  Wachovia argued that the MBS bought by U.S. Central FCU and Western Corporate FCU before they were placed into conservatorship by NCUA fell into a category known as "Alt-A" or mortgages that are neither "prime" nor "subprime" and that  its prospectuses for the investments outlined clearly the risks involved.

In its motion, Wachovia says that "approximately 73% of the loans were reduced documentation or no documentation loans, i.e., loans for which the borrower was not required to submit proof of his or her income, assets, or both."

Wachovia issued, underwrote and sold the funds, which were originated by four lenders: National City Mortgage, Accredited Home Lenders Inc., Wachovia Mortgage Corp., and American Mortgage Network.

NCUA's original complaint against Wachovia alleged that originators of the RMBS had systematically abandoned the stated underwriting guidelines and resulted in riskier RMBS that the corporates would not have bought, had they known.  Wachovia representatives sold about $100 million in RMBS to the corporates in 2006. U.S. Central purchased about $80 million in RMBS underwritten by Wachovia, according to the complaint NCUA filed Nov. 28 (News Now April 3).

Wachovia's motion included "the extensive risk disclosures" in the prospectuses for two offerings, the Wachovia Mortgage Loan Trust and the NovaStar Mortgage Funding Trust. They included:

  • " If the residential real estate market should experience an overall decline …delinquencies, foreclosures and losses could be higher than those now generally experienced;
  • "Most of the loans in the pools would not meet the requirements of Fannie Mae and Freddie Mac;
  • "As a result of the underwriting guidelines used …these mortgage loans are likely to experience rates of delinquency, foreclosure and bankruptcy that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten to Fannie Mae and Freddie Mac conforming guidelines;" and
  • "There is no assurance that the ratings [by rating agencies] …will not be qualified, lowered, or withdrawn."
Wachovia also said the complaint lacked any allegations specific to the originators of the mortgage loans underlying the offerings and said that "generic allegations" are not enough for a claim.

The crux of Wachovia's motion to dismiss focused on NCUA's meeting requirements for statute of repose and statute of limitation deadlines for filing the lawsuit and whether an extender statute applies to the case. Wachovia noted that the three-year statute of repose extinguishes NCUA's federal claims and that the extender statute, which would grant an extension to the deadline for filing in some cases, does not apply.

Those arguments followed a tentative ruling set in a U.S. District Court in California on a similar RMBS case, NCUA vs. RBS Securities, and said a case cited by NCUA, American Pipe Tolling, does not apply.

News Now contacted NCUA for a comment. NCUA's policy is to not comment on pending litigation.


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