NCUA tries to recover $2.4B in MBS losses

Credit union watchdog fights on behalf of small lenders

A top credit union watchdog is fighting over the collapse of several small lenders after the entities felt the sting of billions of dollars in losses on faulty mortgage bonds.

The National Credit Union Administration filed nine lawsuits in Federal District Court in New York against banking giant Morgan Stanley (MS) and eight other institutions over the sale of nearly $2.4 billion in mortgage-backed securities to Southwest and Members United corporate credit unions.

The purpose of the lawsuit is to pursue accountability and recover funds that led to the collapse of firms in the industry, explained NCUA board chairman Debbie Matz.

"All the credit unions we supervise and insure are sharing those costs," Matz said. "The people who are responsible should be required to shoulder that burden, as well."

At the time, Morgan Stanley, Barclays (BCS), JPMorgan Chase/Bear Stearns (JPM), Credit Suisse (CS), Royal Bank of Scotland (RBS) and UBS (UBS) sold allegedly toxic MBS to both corporate credit unions.

Additionally, Goldman Sachs (GS), Wachovia and Residential Funding Securities — now Ally Securities — sold troubled MBS to Southwest.

The organization alleges that the firms made misrepresentations in connection with the underwriting and subsequent sales of MBS.

Consequently, the corporate credit unions became insolvent, placed into NCUA conservatorship and later liquidated as a result of losses from the faulty bonds — causing significant losses to the credit union system, according to the organization.

Additionally, the offering documents of the MBS sold to the corporate credit unions contained statements that supposedly omitted material facts.

According to complaints, the originators systematically abandoned the state underwriting guidelines in the offering documents, resulting in the securities being significantly riskier than represented.

Other advocacy groups in the space commended NCUA’s efforts in pursuing legal remedies to make credit unions whole for losses incurred as a result of the financial crisis.

"Credit unions are paying hefty assessments to cover the costs of the corporates' losses on mortgage-backed securities, and we support NCUA’s efforts to seek recoveries from the responsible entities," explained National Association of Federal Credit Unions president and CEO Dan Berger.

As the liquidating agent for Southwest and Members United corporate credit unions, NCUA is responsible for seeking recoveries from specified parties to minimize the cost of any failures to its insurance funds and the industry. 

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