NEW YORK (5/16/14)--The District Court of New York has denied a motion to dismiss a lawsuit involving the National Credit Union Administration and Wachovia Capital Markets, LLC, now known as Wells Fargo Securities, LLC.
This is the latest in a series of lawsuits brought by the NCUA to various banking institutions on behalf of several corporate credit unions that purchased large amounts of residential mortgage-backed securities in the years between 2005 and 2007 and have since been liquidated. NCUA's complaints generally assert that the offering documents used to sell residential MBS contained material misstatements and/or omissions.
"This is the latest in a series of wins NCUA has had recently when it comes to these type of cases," said Robin Cook, assistant general counsel for special projects for Credit Union National Association. "We commend NCUA for their continued hard work on this issue."
In this case, the NCUA is serving as the liquidating agent for Southwest Corporate FCU and Members United Corporate FCU. Southwest Corporate FCU purchased two RMBS certificates from what was then called Wachovia Capital Markets, in June and December of 2006, for a total of $25,738,350. Both certificates were rated AAA at the time of purchase but were downgraded to junk status by mid-2009, and by June 2013 approximately 25% of the loans for each certificate were delinquent.
The NCUA has claimed that American Mortgage Network, Inc. (AmNet), which originated 100% of the loans in the first certificate, known as AMN1, had a high percentage of "originate-to-distribute" loans, which it said encourages shoddy underwriting practices because the securitization of mortgage loans breaks down the direct relationship between the borrower and the lender.
Wachovia claimed that a forensic analysis of AMN1 "found materially higher LTV (loan-to-value) ratios and lower owner-occupancy rates" than those listed in the offering documents by the NCUA.
The court found that the NCUA has plausibly pled its claims related to the underwriting conduct for loans contained in the first certificate, noting that while there is "no single set of allegations that every plaintiff must include to state a plausible claim," NCUA presented enough factual content to allow the court to draw a reasonable inference.
In 2006, the year AMN1 was sold, AmNet had a 90.3% originate-to-distribute rate, and within one year of securitization, more than 5% of the mortgages in that certificate were delinquent or in default, and has only worsened in later years, rising to 25% by June 2013.
"These allegations, when viewed in their totality, create a plausible inference that AmNet systematically failed to comply with its reported underwriting guidelines," reads the decision.
Wachovia also attempted to have the court dismiss any figures involving loan-to-value (LTV) ratio, arguing that LTV ratios are based upon appraisals that are a matter of opinion, meaning that the NCUA failed to show "that the estimates were both objectively false and disbelieved by the speaker when made."
However, the court ruled that some of the LTV ratios were calculated on purchase price for the property, not appraisals, and are "therefore clearly representations of fact." Also, that an appraisal can be a statement of fact in that it "represents an appraiser's true belief as to the value of the property."