New York shook Monday as the ""Residential Mortgage-Backed Securities"":http://www.stopfraud.gov/leadership.html (RMBS) Working Group fired its first shot against a major bank.[IMAGE]
New York attorney general and co-chair of RMBS Working Group ""Eric T. Schneiderman"":http://www.ag.ny.gov/ announced a Martin Act lawsuit against ""JPMorgan Chase Bank"":http://www.jpmorganchase.com/corporate/Home/home.htm, JPMorgan Securities, LLC (formerly known as Bear Stearns & Co.), and ""EMC Mortgage LLC"":http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=1833007 (formerly EMC Mortgage Corporation) for alleged fraudulent practices designed to promote the sale of RMBS to investors.
Schneiderman's ""complaint"":http://www.ag.ny.gov/sites/default/files/press-releases/2012/jpmcomplaint.pdf alleges that Bear Stearns led investors to believe that the quality of loans in its mortgage-backed securities had been carefully evaluated and would be monitored, both of which never happened. Instead, the attorney general alleges, Bear Stearns ignored the defects its review uncovered and kept investors in the dark about its review procedures. As a result, the company's portfolio included many loans made to borrowers who were likely to default Ã¢â‚¬" and ultimately did.
Schneiderman's complaint goes on to accuse Bear Stearns of misrepresenting the loans in its RMBS, saying they were originated following underwriting standards.
""While the Ã¢â‚¬Ëœdue diligence' review that Defendants represented they undertook should have assessed the quality of the loans deposited into the RMBS, Defendants' actual due diligence process was very different from their public representations about it,"" Schneiderman wrote in the complaint. ""Defendants failed to use due diligence as a tool to identify and eliminate the many defective loans that they purchased from originators.""
As a result of Bear Stearns' and the other defendants' alleged negligence, investors suffered cumulative losses of approximately $22.5 billion.
In addition, another $30 billion in unpaid principal on mortgages remains in those trusts, 43 percent of which is currently 90 days past due, in foreclosure, or considered REO. Schneiderman and RMBS Working Group anticipate more losses from those mortgages.
According to FHFA Inspector General ""Steve Linick"":http://www.fhfaoig.gov/About/InspectorGeneral, the defendants also sold misrepresented mortgage-backed securities to Fannie Mae and Freddie Mac.
The lawsuit is the first legal action from the group, a state-federal task force created by President Obama to investigate the organizations responsible for ""misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities.""
""This lawsuit will bring accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,"" said Attorney General Schneiderman. ""Our lawsuit demonstrates that there is one set of rules for all Ã¢â‚¬" no matter how big or powerful the institution may be Ã¢â‚¬" and that those rules will be enforced vigorously.""