(CN) - Three purchasers of residential mortgage-backed securities want to rescind their acquisitions from RBS Securities Inc., claiming the company misrepresented the credit quality of the investments.
     Plaintiffs CUNA Mutual Insurance Society, Cumis Insurance Society Inc. and Members Life Insurance Co. seek rescission on the grounds of misrepresentation. They claim that between 2004 and 2007, RBS induced CUNA to buy fifteen certificates to ten separate offerings "by making representations about the credit quality of the pools of mortgage loans collateralizing" residential mortgage-backed securities.
     "RBS's offering documents contained various statistical representations about the loan pools backing the RMBS, including their loan-to-value ('LTV') ratios, combined loan-to-value ('CLTV') ratios, and owner-occupancy rates. For investors like CUNA Mutual, these quantitative representations were material because they provided an indication of anticipated default rates in the loan pools and anticipated foreclosure recoveries on the defaulted loans," the complaint says.
     CUNA states that all ten of its investments "performed poorly, and all certificates have since lost much of their value." It also claims that a forensic investigation revealed that many of the representations in the offering documents were false.
     "Specifically, RBS dramatically understated the LTV or CLTV ratios of the loan pools underlying the ten RMBS. On average, the actual weighted average LTV or CLTV ratio across the ten RMBS was 11.84 percent higher than what RBS represented. RBS also falsely represented that not a single loan in the pools had an LTV or CLTV ratio above 100 percent. In fact, on average, 25.76 percent of the tested mortgage loans had LTV or CLTV ratios above 100 percent meaning the outstanding loans on the mortgaged properties exceeded the value of the properties at the time of loan origination. Finally, RBS dramatically overstated the percentage of the mortgages in the underlying loan pools that were owner-occupied. On average, each of the ten RMBS overstated owner-occupancy rates by 12.13 percent. These actual statistical characteristics made the mortgage pools underlying the ten RMBS at issue much more risky than RBS's statistical representations indicated," the complaint states.
     According to CUNA, RBS also falsely stated that loan originators adhered to mortgage underwriting standards.
     "In truth, the originators had systematically abandoned their underwriting standards. The originators' abandonment of underwriting standards has been revealed through regulatory, judicial, and media scrutiny following the collapse of the RMBS market in the second half of 2007. Because the mortgages in the pools collateralizing the RMBS were largely underwritten without adherence to underwriting standards, the RMBS were significantly riskier than RBS represented. In fact, a material percentage of the borrowers whose mortgages comprised the RMBS purchased by CUNA Mutual were all but certain to become delinquent or default after origination. As a result, the RMBS were destined from inception to perform poorly," the lawsuit states.
     In addition, CUNA claims, rating agencies relied on the same falsehoods contained RBS' offering documents. That led to inflated credit ratings in the investments, according to the insurance company.
     CUNA states that its forensic investigation may "offer only a glimpse into the full scope of RBS's misrepresentations."
     "Many other factors are relevant to the integrity of the originators' loan underwriting process, such as borrowers' debt, income, employment verification, and the purported 'compensating factors' that warranted 'exceptions' to stated underwriting standards. The originators' application of these underwriting factors in accordance with their stated underwriting standards can only be scrutinized by obtaining and reviewing the actual loan files through discovery," the complaint states.
     CUNA says it is not accusing RBS of "intentionally or knowingly" misrepresenting the investments but adds that even if the representations were "negligently or innocently made," it is still entitled to rescind the purchases.
     The plaintiffs are represented by Peggy Lautenschlager of law firm Bauer and Bach.