UBS Settles Charges for fraud related to residential mortgage-backed securities (RMBS)
UBS AG and affiliates have agreed to pay $1.435 billion in penalties to settle a civil action filed in November 2018 alleging misconduct related to UBS’ underwriting and issuance of residential mortgage-backed securities (RMBS) issued in 2006 and 2007.
This is the last case brought by a group in the Justice Department dedicated to investigating the conduct of banks and other entities for their roles in creating and issuing RMBS leading up to the 2008 financial crisis, according to the Office of Public Affairs for the DOJ.
Residential Mortgage-Backed Securities (RMBS)
Residential Mortgage-Backed Securities are financial instruments created by pooling together a large number of individual residential mortgages. These mortgages are typically obtained from various lenders and are packaged into a single security. This security is then sold to investors as an investment product. The cash flows generated from the underlying mortgage payments, including principal and interest, are distributed to the investors in the form of regular interest payments.
The idea behind RMBS was to spread the risk associated with individual mortgages among multiple investors, making it possible for financial institutions to provide more loans and mortgages without taking on excessive risk. In theory, these securities seemed like a way to provide a safer investment opportunity by diversifying the risk across many different mortgages.
Financial Crisis of 2008
The 2008 financial crisis, also known as the Global Financial Crisis (GFC), was a severe worldwide economic upheaval that emerged in the United States and had widespread repercussions globally. Numerous financial institutions initiated the practice of offering subprime mortgages to individuals with weak credit histories. These mortgages came with elevated interest rates and often required minimal or no down payments. These risky mortgages were pooled together to form Residential Mortgage-Backed Securities (RMBS).
Further, credit rating agencies assigned high ratings to RMBS and other intricate financial products that contained these subprime mortgages. This led investors to wrongly perceive them as low-risk investments, spurring a surge in demand for these securities.
Additionally, the housing market witnessed a rapid surge in property prices due to speculative buying and lenient lending standards. However, this housing bubble eventually burst, resulting in a decline in home values. As the housing bubble burst and home values declined, a significant number of borrowers who had taken out subprime mortgages found themselves unable to meet their mortgage payments. This triggered a wave of mortgage defaults and foreclosures.
Multiple financial institutions had heavily invested in RMBS and similar securities. As the underlying mortgages began defaulting, the value of these securities plummeted, inflicting substantial losses on these institutions. The crisis had a cascading effect, leading to a severe credit shortage, the collapse of major financial institutions, and a profound global recession.
$36 Billion in Penalties
The Justice Department has reportedly collected more than $36 billion in civil penalties from entities for their alleged conduct in connection with mortgages securitized in failed RMBS leading up to the 2008 financial crisis. These resolutions include settlements with the following banks, mortgage originators, and rating agencies:
Aurora Loan Services;
Bank of America;
Royal Bank of Scotland;
The United States filed a complaint alleging that UBS defrauded investors in connection with the sale of 40 RMBS issued in 2006 and 2007. UBS allegedly knowingly made false and misleading statements to buyers of these securities relating to the characteristics of the mortgage loans underlying the RMBS in violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The FIRREA claims were based on alleged violations of the mail, wire, and bank fraud statutes.
The government’s complaint alleged that contrary to UBS’ representations, UBS knew that significant numbers of the loans backing the RMBS did not comply with loan underwriting guidelines that were designed to assess borrowers’ ability to repay. The complaint further asserted that UBS knew that the property values associated with a significant number of the securitized loans were unsupported, and that significant numbers of the loans had not been originated in accordance with consumer protection laws. UBS was allegedly aware of these significant problems because it had conducted extensive due diligence on the underlying loans prior to the RMBS being issued to determine whether the loans were consistent with representations that would be made to investors. Ultimately, the 40 RMBS sustained substantial losses.
FINRA Arbitration Attorneys
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Last modified: August 21, 2023