Municipal bond insurer Assured Guaranty Municipal Corp. sued UBS Real Estate Securities Inc. Thursday.
The suit concerns three groups of mortgage-backed securities that UBS sold to investors in 2006 and 2007. UBS paid Assured to insure portions of the securities totaling $1.49 billion.
As part of getting Assured to insure the bonds, UBS told Assured that the loans “met specified quality-control standards and were underwritten according to applicable guidelines,” according to Assured’s court complaint.
While experiencing mounting claims at the end of 2009, Assured began examining loan files and other documentation associated with thousands of the mortgage loans.
“This review revealed that the mortgage loans did not have the characteristics represented on the mortgage loan schedules for the transactions, were made to borrowers who could not afford to repay them, who committed fraud in their loan applications, or who otherwise did not satisfy the basic risk criteria for prudent and responsible lending,” the complaint states.
In its review of 2,945 delinquent and liquidated mortgage loans, Assured claims it found that a “staggering percentage of these mortgage loans breached one or more mortgage representations.” The percentages varied from 81% to 95% of the each of the three groups.
Assured has requested that UBS cure or repurchase 2,440 defective mortgage loans. UBS has refused except for a very small fraction, Assured says in its complaint.
As of the end of 2011 Assured had received premium payments of around $3.1 million, Assured states. By Jan. 31, 2012, it had paid out some $308 million in claims. It remains exposed to tens of millions of dollars in further claims payments.
Among the actions Assured seeks are that UBS pays the insurer for the mortgage-related claims it has, that UBS pays for lost business opportunities, and that the firm reimburses Assured for its legal expenses. The suit was filed in New York Supreme Court and has the index number 65037/2012.
UBS issued a statement in response to the suit. “Assured is a sophisticated market participant and understood the risks it was underwriting when it agreed to insure approximately $1.5 billion in residential mortgage-backed securities backed by high-risk mortgages,” UBS said. “Now that it has had to pay claims under the policies it wrote, Assured is attempting to shift responsibility to UBS through indiscriminate loan repurchase demands and this lawsuit. Assured’s position is wrong, as we intend to show in court.”
This is not the first lawsuit for Assured relating to mortgage-backed securities that it insured. It has filed lawsuits against Credit Suisse, JPMorgan Chase & Co., Deutsche Bank and Flagstar Bank over similar claims.