U.S. Bank has sued Bank of America, claiming that "a company it acquired sold defective mortgages to a $2 billion residential mortgage-backed securities [RMBS] trust and failed to disclose problem mortgages to the trust’s investors," Reuters reported.
According to Reuters, U.S Bank has alleged that Bank of America predecessor company First Franklin Financial Corp. "breached its contractual duties by selling the defective mortgages and failing to repurchase them after problems surfaced." U.S. Bank filed the suit in "its capacity as trustee for the RMBS trust."
The case is just the latest in a long line of wide-ranging litigation stemming from the financial crisis, many of which is still being resolved. In 2015, Prudential Insurance Co. moved to settle its lawsuits with Bank of America NA, Merrill Lynch & Co. Inc., and First Franklin Financial Group. The suits, which were first filed in March 2013, alleged Bank of America and others knowingly sold Prudential $2.1 billion in low-quality mortgage-backed securities—and made false statements about them. Prudential claimed this left the company with more than 10,000 defective home loans, many that eventually went into default or foreclosure.
Recent RMBS Performance
Morningstar Credit Rating’s research reported that RMBS credit performance backed by nonqualified mortgage loans remained strong in Q1 2019. Morningstar's report indicated that, while high prepayment levels may typically indicate poor loan quality, the trend of recent relatively high prepayments has not impacted credit quality. Morningstar's report states that prepaid loans and the remaining loans have a similar credit quality, noting that many deals have seen prepayment rates above 20%.
“As noted in our RMBS outlook for 2019, we expect non-QM RMBS issuance to continue to increase in 2019, with the credit quality of the collateral weakening somewhat but remaining overall consistent with the prior year,” said Morningstar in a release. “Also, we expect the non-QM RMBS transaction structures to evolve as issuers explore ways to optimize funding costs and maximize proceeds from securitization.”
Government-backed loans as a whole have seen a resurgence. Kroll Bond Ratings Agency reported 63% increase in residential mortgage-backed securities issued in 2018 over 2017. The report indicated that if the U.S. GDP was to grow at the steady pace it has this year, until July 2019, the year could see "another robust issuance year in 2019." However, factors such as higher interest rates, home price moderation, and widening spreads that have been experienced by the market in the last few weeks are likely headwinds that might pull down the performance of RMBS next year, the report revealed.