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Corporate Credit Unions

NCUA Races Statute Of Limitations In Suing Wall Street

JUN 20, 2011 2:12pm ET
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ALEXANDRIA, Va. – NCUA said its suits against JP Morgan Chase and RBS Securities over the sale of toxic mortgage backed securities to failed corporate credit unions should be considered by the federal court where they were filed earlier today as within the statute of limitations, even though some of the sales took place as long as five years ago.

Under the Federal CU Act, NCUA, as conservator of U.S. Central FCU and WesCorp FCU, which purchased billions of dollars in toxic MBS from the two firms, has a year “after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence,” NCUA said in its separate suits. NCUA took the two corporate giants under conservatorship in March 2009, but has been working since then to determine the quality of the MBS purchased by the two corporate failures.

That means that NCUA should not be barred by any statute of limitations from suing the Wall Street firms, even though some of the MBS were purchased in 2006. Both suits were filed in the U.S. District Court in Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central, the one-time $52 billion corporate being dismantled by NCUA.

Meantime, the two suits show the nature of the subprime mortgages that were packaged into MBS by the Wall Street firms and sold to buyers like U.S. Central and WesCorp. The two suits show that the securities bought by U.S. Central and WesCorp, as well as Members United Corporate FCU and Southwest Corporate FCU, were created with loans originated by some of the most notorious subprime lenders, some of which eventually went bust, like IndiMac, Ameriquest, American Home, Fremont Home Loans, New Century, Option One, Washington Mutual, Wachovia, NovaStar and Countrywide Mortgage.

In its suits, NCUA alleges that JP Morgan and RBS ignored their own underwriting standards in accepting mortgages for securitization. Prospectuses offered by the two were erroneous, according to NCUA, because the “originators did not adhere to the stated underwriting guidelines, did not effectively evaluate the borrowers’ ability or likelihood to repay the loans, did not properly evaluate whether the borrower’s debt-to-income ratio supported a conclusion that the borrower had the means to meet his/her monthly obligations, and did not ensure that adequate compensating factors justified the granting of exceptions to guidelines.”

The originators, claims NCUA., “systematically disregarded the stated underwriting guidelines in order to increase the volume of mortgages originated.”

Virtually all of the MBS that turned out to be toxic were rated Triple A when they were bought by the corporates, according to the suits.

NCUA is seeking $565 million in damages from RBS and $278 million from JP Morgan.

The suits come as NCUA is still struggling with the costs of the corporate bailout necessitated by the failure of the five corporates (including Constitution Corporate FCU). NCUA says it has not updated its loss estimates for the bailout, but the recent completion of its guaranteed notes offering to finance the program gives somewhat of a guidepost. NCUA said it sold $28 billion worth of NCUA Guaranteed Notes securitized by $50 billion in MBS held by the five corporates, which suggests losses of around $20 billion. Credit union have already paid almost $7 billion, first by the elimination of $5.5 billion of their capital in the corporates, then by more than $1.1 billion in corporate assessments the past two years.

NCUA said it is also discussing the corporate losses with a number of other sellers, issuers and underwriters. If NCUA is unable to reach reasonable settlements on behalf of the liquidated credit unions with these additional parties, the agency will likely bring additional lawsuits. Among the targets are believed to be Goldman Sachs and Bank of America, which now owns Countrywide.

Representatives of JP Morgan and RBS were not immediately available for comment.

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