Bond insurer Assured Guaranty (AGO) is suing Swiss bank UBS (UBS) over three residential mortgage-backed securities deals, securitized and sold off to investors, leaving the monoline on the hook for millions in unexpected defaulted loans, according to the complaint.  

UBS dismisses the allegations in the suit: “Assured is a sophisticated market participant and understood the risks it was underwriting when it agreed to insure approximately $1.5 billion in RMBS backed by high-risk mortgages. Now that it has had to pay claims under the policies it wrote, Assured is attempting to shift responsibility to UBS through indiscriminate loan repurchase demands and this lawsuit. Assured’s position is wrong, as we intend to show in court.”

In a suit filed in a New York state court, Assured Guaranty says it insured the loan risk on three major UBS deals and ended up with $308.2 million in mortgage default claims — an amount that far exceeds the $3.1 million in  premiums collected on the transactions. 

While Assured Guaranty was tapped to insure the risk, the bond insurer claims UBS breached representations and warranties made on the loans during the securitization process by misstating the quality of collateral backing the bonds.

Assured, in its complaint, said UBS like other securitizers of mortgages sought out insurance for the deals to make the securities more attractive to investors.

After noting an uptick in claims on the home loans, Assured analyzed 2,945 delinquent and liquidated mortgage loans with a principal balance of $1.17 billion.

In the UBS 2006-OA2 transaction, which had an original principal balance of $67.7 million, 90% of the loans studied breached at least one representation made about the underlying quality of the loans, Assured said. The insurer also alleged at least 81% of the loans making up the principal balance of $832 million in the 2006-0A2 transaction violated at least one rep and warranty. In the 2007-A transaction, Assured says 95% of the $273 original principal balance of mortgages are out of sync with loan quality representations made. 

“UBS Real Estate has refused to repurchase all but a small fraction of these defective mortgage loans within the 90-day cure or repurchase period, despite its contractual obligation to do so,” Assured Guaranty wrote in its suit. “UBS real estate’s refusal to repurchase these defective mortgage loans leaves Assured uncompensated for its losses.”

Assured Guaranty is suing to compel UBS to repurchase loans that breached reps and warranties made in pooling and servicing agreements that guided the transfer of the mortgages into a securitized trust. 

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