Wednesday, May 9, 2012

Prudential RMBS suit with Morgan Stanley reminder of need to address opacity in structured finance

Bloomberg reports that Prudential is suing Morgan Stanley over the purchase of $1 billion in mortgage backed securities.

The case highlights the opacity of these securities and the fact that Wall Street's ownership of the mortgage originators and servicers provided Wall Street with an informational advantage.

Prudential Financial Inc. (PRU), the second- largest U.S. life insurer, sued Morgan Stanley over the purchase of $1 billion in residential mortgage-backed securities. 
Morgan Stanley, the sixth-largest U.S. bank by assets, made untrue statements and omitted material facts before Prudential bought RMBS certificates issued with 41 mortgage-loan securitizations from July 2004 to August 2007, according to the complaint filed in state court in Newark, New Jersey. 
“A high percentage of the mortgage loans backing the certificates have defaulted, been foreclosed upon, or are delinquent,” according to the complaint. Poor loan performance “caused a massive decline in the value of the certificates and Prudential investment losses in excess of $350 million.” 
The bank falsely claimed mortgages met underwriting guidelines, homes securing loans were legitimately appraised, and the bank properly transferred titles, according to the complaint filed April 25. 
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s....
Morgan Stanley faced similar lawsuits in recent months from investors including Asset Management Fund, Bayerische Landesbank and MetLife Inc. (MET)  
On April 3, the Federal Reserve ordered the bank to review foreclosures conducted by its Saxon mortgage servicer before the unit was sold and compensate injured borrowers. 
Prudential claims Morgan Stanley violated the New Jersey Uniform Securities Law, engaged in common law fraud and negligent misrepresentation, and interfered with the insurer’s contractual rights. It seeks compensatory and punitive damages.

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