Assured Guaranty Sues RBS Over Mortgage Loans

The list of bond insurers’ mortgage-backed securities-related lawsuits against banks has gotten longer.

This week, bond insurer Assured Guaranty Municipal Corp. sued RBS Securities Inc. over a $1.15 billion securitization known as the Soundview Home Loan Trust, which included over 4,900 residential mortgage loans.

In its complaint, filed in the U.S. District Court of the Southern District of New York on Tuesday, AGM says the securitization was “unlawful” and included thousands of “defective and fraudulently” originated loans.

A spokesperson for RBS Securities declined to comment.

The bond insurer is seeking an amount to be determined at trial, plus pre- and post-judgment interest and court costs.

According to the complaint, AGM insured interest and principal payments on about $291 million of securitizations and said it has already paid claims totaling over $160,000. The bond insurer projects that it will pay more than $100 million in claims.

AGM said that RBS fraudulently induced the company to insure the loans, which were originated by WMC Mortgage, Corp., by misrepresenting characteristics of the loans. The loans have experienced extraordinarily high rates of default, and have fallen to junk status from original AAA ratings, according to the bond insurer.

“Indeed, Soundview is one of the worst performing [residential mortgage-backed security] transactions of the last decade,” AGM said in the complaint. “As of February 25, 2013, the cumulative realized losses on the Mortgage Loans exceed $434 million, or 37% of their original principal balance. In addition, approximately 63% of the remaining Mortgage Loans are currently in default, with the borrowers having missed two or more monthly payments.”

The lawsuit joins the ranks of at least 20 others brought by bond insurers relating to RMBS transactions gone bad. So far, AGM has been the only plaintiff to win a representations and warranties case.

“In the end, we believe AGO will ultimately be viewed as an example of the fact that it pays to do your homework,” said BTIG analyst Mark Palmer.

He noted AGM’s forensic review of the Soundview mortgages that covered 1,482 of the securitization’s underlying loans, which found that 1,376 of the loans reviewed — or 93% — were found to have breached R&Ws.

“At this point, AGO’s R&W recovery machine kicked in,” Palmer said. “The same intense, proactive forensic approach that inspired Bank of America to offer a settlement to AGO over its R&W liabilities without the bond insurer having to file a lawsuit against it, and that helped AGO to achieve the first-ever court victory by a monoline in an R&W case in Assured Guaranty Municipal Corp. v. Flagstar Bank earlier this year, was used again against RBS.”

AGM holds an A2 rating from Moody’s Investors Service, which was downgraded from Aa3 in January.

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