The ""National Credit Union Administration"":http://www.ncua.gov/Pages/default.aspx (NCUA) announced Monday it has filed suit against ""JPMorgan Securities"":http://www.jpmorgansecurities.com/pages/am/securities/home and Bear Stearns over allegations of falsely representing the quality of mortgage-backed securities (MBS) sold to corporate credit unions.[IMAGE]
At $3.6 billion, the legal action is the largest suit ever filed by the NCUA.
According to the agency, Bear Stearns (purchased in 2008 by JP Morgan) misrepresented the underwriting standards of loans in securities sold to U.S. Central, Western Corporate, Southwest Corporate, and Members United Corporate. The four credit unions became insolvent and were placed into NCUA conservatorship and liquidated.
NCUA's 280-page ""complaint"":http://www.ncua.gov/News/Press/NW20121217JPMComplaint.PDF alleges that although Bear Stearns' offering documents for the securities described the firm's adherence to underwriting guidelines, the originators had in fact ""systematically abandoned the stated underwriting guidelines in the Offering Documents.""[COLUMN_BREAK]
""Because the mortgages in the pools collateralizing the RMBS were largely underwritten without adherence to the underwriting standards in the Offering Documents, the RMBS were significantly riskier than represented. Also, properties were routinely overvalued at the time of origination, rendering the average LTV ratios inaccurate. Indeed, a material percentage of the loans collateralizing the RMBS were all but certain to become delinquent or default shortly after origination. As a result, the RMBS were destined from inception to perform poorly,"" the complaint reads.
""Firms like Bear, Stearns acted unfairly by ignoring the rules for underwriting. They packaged these securities and then told buyers the paper was sound,"" said Debbie Matz, NCUA board chairman. ""When the securities plunged in value, we learned the truth. NCUA is now working to hold these underwriters accountable and secure recoveries on behalf of federally insured credit unions.""
The agency has eight similar actions pending against other companies, including Barclays, Credit Suisse, Goldman Sachs, and Wachovia. It's the second suit brought by NCUA against JPMorgan, the first being in 2011.
""NCUA and credit unions have successfully worked together to restore stability to the credit union system,"" Matz said. ""Now we are holding responsible parties like Bear, Stearns accountable for their actions. It's the right thing to do.""
A spokesperson for JPMorgan did not reply to a request for comment.