ResCap Sues Banks Over Faulty Mortgages

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UBS AG (UBS), SunTrust Banks, Inc. (STI) and Capital One Financial Corp. (COF) were sued by an affiliate of ResCap – the redundant mortgage company of Ally Financial. The affiliate of ResCap, Residential Funding Co. filed a lawsuit, which demanded that the above-mentioned banks buy back the allegedly faulty loans pooled into mortgages bonds.

A complaint was filed in New York State Supreme Court in Manhattan against UBS Real Estate Securities Inc. – a unit of UBS AG. The plaintiff alleged that almost 44% of the $460 million worth of loans it bought from UBS were faulty, and as a result became delinquent.

Complaints against SunTrust and GreenPoint Mortgage Funding Inc. (an affiliate of Capital One that was closed down in 2007) were filed in a federal court in Manhattan. Residential Funding seeks damages against almost $3 billion in loans from SunTrust Mortgage and millions of dollars worth of mortgages from GreenPoint.

The lawsuits accuse the banks of breach of contract and claim that they sold mortgage loans to Residential Funding that did not conform to its quality-standards. Further, the lawsuit alleged that erroneous documentation, fraud by borrowers, or deceptive and inflated appraisals prevented Residential Funding from understanding the flawed nature of the loans.

ResCap had serviced more than $374 billion in U.S. residential mortgage loans before declaring bankruptcy in May 2012 to address towering mortgage liabilities. Recently, it was granted court approval for a liquidation plan that resolves more than $100 billion in potential lawsuits, putting the mortgage lender on track to end its bankruptcy before the end of 2013.

Major U.S. banks such as JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Morgan Stanley (MS) are facing a wave of lawsuits, which charge them of selling substandard mortgage securities during the financial crisis. These have added to the legal woes of banks in recent times.

Though these lawsuits could tarnish the image of the banks, investors and financial institutions that suffered due to these faulty practices, are expected to be fairly compensated.

While UBS AG currently carries a Zacks Rank #4 (Sell), both SunTrust and Capital One have a Zacks Rank #3 (Hold).

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