KANSAS CITY, Kan. (9/16/13)--A U.S. District Judge in Kansas has rejected three arguments made by RBS Securities in a motion to dismiss the National Credit Union Administration's lawsuit over losses from residential mortgage-backed securities (RMBS) sold to U.S. Central FCU.
The suit centers on losses related to 20 offerings involving 29 RMBS or certificates sold by RBS to U.S. Central, which no longer exists. The agency filed the lawsuit--one of nine similar lawsuits against RMBS brokers who sold securities to U.S. Central and four other corporate credit unions prior to 2008--as the corporate credit union's liquidating agent.
A previous judge had dismissed NCUA's claims in part but also allowed NCUA to file an amended complaint. NCUA amended its complaint and the matter is now before U.S. District Judge John W. Lungstrum, who filed the ruling Thursday.
In ruling not to dismiss the lawsuit, the judge denied three RBS arguments:
1. NCUA lacked detailed, originator-specific information in its allegations that the originators of the loans underlying the RMBS "systematically abandoned underwriting guidelines" and misrepresented the certificates. NCUA's amended complaint is based on a "forensic analysis of 13,708 loans from the six dismissed offerings, average loan-to-value (LTV) and owner-occupancy ratios" and allege they were "significantly understated and thus misrepresented."
Thursday's ruling noted that NCUA's "forensic analysis, based on the particular loans underlying the six dismissed offerings, support a plausible claim of misrepresentations involving the LTV and owner-occupancy ratios. Not only are those alleged misrepresentations independently actionable, they provide a connection to the particular certificates at issue and thus support a plausible claim based on the abandonment of underwriting guidelines. That is true for claims based on these six offerings, even without originator-specific allegations."
2. RBS couldn't be held liable for merely repeating misrepresentations by borrowers on the underlying loans. NCUA had alleged that owner-occupancy ratios were misrepresented. The court rejected RBS's argument, saying it was adopting an analysis made in a similar lawsuit that NCUA brought against another securities broker, Credit Suisse.
3. NCUA's allegations of actual losses exceeding expected losses were "implausible." Lungstrum ruled that "although (NCUA) has not changed its figures and graphs, the amended complaint now makes clear that the 'actual loss' and 'expected loss' used for comparison for each certificate actually represent 'actual gross loss' and 'expected gross loss,' in the sense that they refer to the amount of principal remaining on the defaulted loans prior to any recovery through a foreclosure sale." The clarification shows NCUA "has actually compared gross, pre-recovery default figures, and not post-recovery figures as indicated in the original complaint."
The court went on to say that NCUA's use of "loss" in the context may be misleading, but "nevertheless, the court agrees with (NCUA) that the fact that actual defaults exceeded expected defaults within a short time after issuance has relevance. Although such evidence may not be as strong as a surge in actual over expected losses, it nevertheless does support the inference that the loans were not underwritten properly."
The court also did not buy RBS's allegations that changing the comparison of losses to a comparison of defaults weakened NCUA's allegations.