Underwriters Goldman Sachs, UBS, and Bear Stearns (now owned by JP Morgan) allegedly sold more than $175 million of mortgage-backed securities to insurance giant Mass Mutual without disclosing that they were composed of troubled loans, which made the securities “junk” worth only $40 million, according to a Law 360 article, citing a civil action filed by Mass Mutual. Many similar actions have been filed by major institutional investors against “the architects of the subprime implosion,” according to the article.
Mass Mutual alleges that the underwriters should have known that the originator, the now-bankrupt American Home Mortgage Investment Corp., made the loans “on the basis of overstated incomes, inflated appraisals, false verifications of employment and exceptions to underwriting criteria that had no proper justification.”
American Home Mortgage, without deposits to keep it afloat, had “[t]o originate as many loans as possible to generate fees” and “abandoned underwriting guidelines, often issuing loans to borrowers regardless of their ability to pay,” according to Mass Mutual.
Many of the representations made about the loans were false, giving Mass Mutual the right to rescind the transactions under the Massachusetts Securities Act, according to the complaint.
The case is Massachusetts Mutual Life Ins. Co., case number 3:11-cv-30126, in the U.S. District Court for the District of Massachusetts.
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