Losses on the
underlying mortgages in the pool have been covered primarily by the lenders' mortgage insurance (LMI) provider, QBE Lenders' Mortgage Insurance Limited (Insurer Financial Strength Rating: AA-/Stable); the average payout ratio has been 87%.
Depending on characteristics of the bonds and the number of
underlying mortgages that are defeased, a credit agency may even upgrade the security's rating.
Similarly, most of what followed, including the varied and many real and synthetic financial products that were created based on these
underlying mortgages, involved contracts made by people who had no intent to defraud.
Low loan-to-value ratios among the loans in these deals reduce the probability of default of
underlying mortgages, decreasing the credit risk within the deals themselves.
A November article in the New York Times questioned whether the deficiencies were based on faulty
underlying mortgages.
The Second Circuit found that the certificates issued by the RMBS trusts were "certificate[s] of interest or participation" because (a) they were certificates (as opposed to notes) and (b) payments to certificate-holders were contingent on the cash flows from the
underlying mortgages. The Second Circuit held that the certificate holders did not have to receive all of the cash flows in order to make the payments contingent and therefore qualify as a "certificate of interest or participation." The issue of whether the certificates remained "certificates of interest or participation" was "arguably [a] more difficult question" for the Second Circuit because the payments on the
underlying mortgages were not simply passed through to certificate holders.
Whole mortgage notes produce income from the
underlying mortgages. The investor also benefits from the “collateral gap” between the amount paid to purchase the note and its value when it is paid off or refinanced, or if the home is sold.
On Tuesday, the Securities and Exchange Commission charged Bank of America (BAC) and two subsidiaries with defrauding investors who bought residential mortgage-backed securities (RMBS) by failing to disclose key risks and misrepresenting facts about the
underlying mortgages.
According to the suit, Wells Fargo Securities, formerly Wachovia Capital Markets, sold USD1.5bn of highly-rated securities to LBBW Luxemburg, even though it knew that the
underlying mortgages were risky.
A Manhattan jury decided Tuesday that a Citigroup employee who sold a mortgage security without telling customers that the bank was betting against some of the
underlying mortgages did not violate any securities laws.
Syncora said it was duped into insuring the mortgage-backed securities and that Countrywide misrepresented the quality of the
underlying mortgages.
