Tuesday, April 3, 2012

Yet another RMBS lawsuit alleging fraud by Wall Street

The Telegraph reports on yet another RMBS lawsuit alleging fraud and misrepresentation in the quality of the underlying mortgages by Wall Street.  This time the lawsuit is between Ambac, a monoline insurer, and JP Morgan.

Regular readers know that requiring residential mortgage-backed securities to provide observable event driven disclosure would eliminate any possibility of the alleged behavior occurring in the future.

Under observable event driven disclosure, every time there is an observable event (for example, a payment, delinquency, default or modification) involving the underlying collateral, it is reported by 7:00 a.m. on the following business day and is easily disseminated for free to all market participants by using a data warehouse.

Observable event driven disclosure assures that all market participants have access to current information on the underlying collateral.  Hence, market participants do not have to rely on representations made about the underlying collateral, but can perform their own independent assessment.

In addition, no market participants have an information advantage based on their ownership of the billing and servicing firms.

Ambac, one of the world’s biggest bond insurers, is suing JP Morgan Chase in an effort to recover money it claims to have lost from insuring mortgage-backed securities sold by Bear Stearns. 
The insurer says that it has received claims of more than $200m (£125m) on a series of mortgage-backed bonds that it insured for Bear Stearns in 2006, according to a New York court filing. 
It is taking legal action because it alleges that Bear Stearns deceived it about the quality of the mortgages included in the securitised bonds, which have since “failed miserably” as homeowners defaulted on their payments. 
The aggressive push by Bear Stearns into the once-booming market for mortgage-backed bonds led to its collapse once US house prices began falling.... 
“Driven by management’s 'Bear don’t care’ mentality, Bear Stearns perpetrated a massive fraud that deceived investors and financial guarantors, such as Ambac, into believing that the mortgage loans backing its securitisations were originated pursuant to established underwriting guidelines and were therefore of good quality,” Ambac said in the filing. 
Ambac’s action is the latest in a spate of lawsuits that have been filed in the last year over losses incurred since the financial crisis.

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