Regulation

Court denies motion to dismiss NCUA RMBS suit against Wachovia

GavelThe District Court of New York denied a motion last week to dismiss a lawsuit brought by the National Credit Union Administration (NCUA) against Wachovia Capital Markets—now Wells Fargo Securities—over mortgage-backed securities sold to credit unions.

The suit is the latest in a series of lawsuits brought by the NCUA over RMBS purchased by several corporate credit unions between 2005 and 2007 that alleged the documents accompanying the securities were misstatements or omitted certain information.

NCUA maintains that American Mortgage Network (AmNet), which originated 100 percent of loans from the first RMBS certificate, purchased in 2006, had a high percentage of “originate-to-distribute” loans, which the regulator said encourages faulty underwriting practices.

According to the court, NCUA plausibly presented its claims, adding that while there is “no single set of allegations that every plaintiff must include to state a plausible claim,” the regulator has provided enough factual evidence to allow the court to draw an inference.

Wachovia asked the court dismiss figures on loan-to-value ratios, saying LTV ratios are based on appraisals, adding that the NCUA failed to demonstrate “that the estimates were both objectively false and disbelieved by the speaker when made.”

The court said, however, that some LTV ratios were calculated based on purchase price for the property—not appraisals—and are “clearly representations of fact,” adding that an appraisal can be a statement of fact because it “represents an appraiser’s true believe as to the value of the property.”

“These allegations, when viewed in their totality, create a plausible inference that AmNet systematically failed to comply with its reported underwriting guidelines,” the court said.

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