Deutsche Bank and Justice Dept. Complete Deal on Mortgage Crisis

The New York Times |  January 17, 2017        The Justice Department completed a deal with Deutsche Bank on Tuesday that will require the bank to pay $7.2 billion for its sale of toxic mortgage securities in the run-up to the 2008 financial crisis, the department said.

The settlement calls on Deutsche Bank to pay a civil penalty of $3.1 billion and provide $4.1 billion in consumer relief to homeowners, borrowers and communities harmed by its practices.

The total is the largest amount ever paid to resolve charges against a single entity for misleading investors in residential mortgage-backed securities, the department said in a statement.  Read more here.

UBS Blamed in U.S. Trial for $2.1 Billion in Mortgage Bond Losses

Reuters | April 18, 2016     UBS AG went to trial on Monday over $2.1 billion in losses that investors incurred on mortgage-backed securities after the collapse of the U.S. housing market.

The non-jury trial in Manhattan federal court stems from a lawsuit being pursued by U.S. Bancorp on behalf of three trusts established for mortgage-backed securities, the type of financial product at the heart of the 2008 financial crisis.

Sean Baldwin, the trusts' lawyer, in his opening statement said UBS contractually agreed that the mortgages underlying those securities would meet certain standards. When pervasive defects emerged, the bank refused to buy them back, he said.

"UBS's strategy has always been the same throughout this process: Turn a blind eye to the problems and ignore its contractual obligations," he said.

But Thomas Nolan, a lawyer for UBS, told U.S. District Judge Kevin Castel that the trusts' lawyers were looking at the loans with a "hindsight bias," and the question was whether the loans were seen as defective when they were issued in 2006 and 2007.

"Sophisticated parties on both sides knew what they were getting into," Nolan said.

The case is one of a handful to go to trial in recent years over losses incurred on mortgage bonds following the U.S. housing market meltdown.  Read more here.

J.P. Morgan Readies Mortgage-Backed Deal

Deal is J.P. Morgan’s first since the financial crisis involving mortgages entirely owned by the bank

Wall Street Journal | March 14, 2016   J.P. Morgan Chase & Co. is trying to sell new securities that would pass along most of the credit risk on $1.9 billion in mortgages, in an attempt to revive a debt market that has been largely left to the government since the financial crisis.

The largest U.S. bank by assets is expected to price the residential mortgage-backed deal over the next two weeks. J.P. Morgan would hold 90% of the deal by keeping the safest parts, or the most senior tranches, and plans to sell off the riskier pieces to investors.

Banks issued trillions of dollars worth of bonds backed by home loans in the years before the financial crisis but have had trouble winning over investors burned when the market crashed. Financial institutions issued $61.6 billion in private mortgage bonds in 2015, up from $54.1 billion in 2014 but a fraction of the $1.19 trillion issued at the peak of the housing boom in 2005, according to data from trade publication Inside Mortgage Finance.

Government-sponsored entities Fannie Mae and Freddie Mac have dominated the market in their absence. The two companies have recently been selling new securities that use derivatives to unload the risk of default on the mortgages they guarantee.

The new deal is J.P. Morgan’s first “house transaction” since the financial crisis, meaning it is entirely backed by mortgages the bank owns. The pool includes a mix of more than 6,000 mortgages, both newer and refinancings, around 75% of them conforming with the underwriting standards set by Fannie and Freddie. Most of the mortgages are made to individuals with high credit scores.  Read more here.

Virginia Reaches $63 Million Pact with 11 Banks in Mortgage Bond Fraud Suit

Reuters | January 22, 2016   A group of 11 banks agreed to pay more than $63 million to settle allegations that they misled the Commonwealth of Virginia and its retirement system about residential mortgage backed-securities, Attorney General Mark R. Herring said on Friday.

The banks, which include two Bank of America Corp units , Morgan Stanley and a unit of the Royal Bank of Scotland Group PLC, defrauded the state's retirement fund by selling it shoddy mortgage bonds in the run-up to the financial crisis, Virginia's attorney general said in a 2014 lawsuit.

None of banks admitted liability in the settlement, Herring said.

The $63 million pact is the largest non-health care-related sum ever obtained in a suit brought under a Virginia law aimed at curbing fraud against the commonwealth's taxpayers, Herring said in a statement.

In the lawsuit, Herring said an analysis showed nearly 40 percent of the mortgages that backed 220 securities purchased by Virginia's retirement fund were fraudulently represented as posing a lower risk of default than they actually did.  Read more here.

Fannie and Freddie Give Birth to New Mortgage Bond

The Wall Street Journal |  December 29, 2015     The federal government is trying to get taxpayers off the hook for billions of dollars of potential losses if another mortgage crisis arrives—and in the process, it is quietly giving birth to a new asset class.

Under government control, mortgage-finance giants Fannie Mae and Freddie Mac next year plan to ramp up sales of new types of securities that in effect transfer potential losses in a housing downturn to private investors.

Called Connecticut Avenue Securities by Fannie Mae and Structured Agency Credit Risk by Freddie Mac, the securities are essentially bonds whose performance is tied to that of a pool of mortgages. If the mortgages default, investors in the bonds could lose some or all of their principal.  Read more here.