Mortgage Backed Securities

Wedbush Hit with Nun’s Complaint over CMO’s – May Have More Than Brokers in Common with Brookstreet

Published on: July 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Last month, when Brookstreet Securities suffered a flame-out over high risk mortgage investments, its second in command, also the son of its founder, joined Wedbush Morgan and invited Brookstreet brokers to join him at that firm. Some thought it an odd fit, but the firms may have more in common than earlier believed.

Recently, a group on nuns, who claim they were led to believe they were making safe investments, apparently had their funds invested by Wedbush into mortgage-backed CMO securities which were just pools of mobile home loans. They soon lost $1 million, according to a complaint filed by The Sisters of St. Joseph of Carondelet in California against Wedbush Morgan in arbitration through the National Association of Securities Dealers.

Ed Wedbush, president of the firm that handled the nuns’ investments, said in an interview that the losses in this and other cases came on the riskier portions of mortgage investments and were the result of “clients being very aggressive and wanting high yields.” They should have understood, he said, that “high yield is high risk.” (The statement resembles another recently made by Oppenheimer & Company, which claimed an elderly widow “only has herself to blame” for losses in a joint account as her husband lay dying. Oppenheimer was subsequently fined $1 million and ordered to reimburse over a million to the widow by the state of Massachusetts.)

H&R Block Earnings are Sunk by Subprime Mortgage Unit

Published on: June 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

H&R Block reported a loss of $433.7 million for its fiscal year 2007, compared to a gain of $490.4 million a year ago, and it lost $85.6 million in the fourth quarter vs. a gain of $587.5 in the year earlier period. The losses can mostly be attributed to Option One, its subprime mortgage unit, which the company hopes to soon sell.

The nation’s largest tax preparer was started in Kansas City by Henry and Roger “Bloch” brothers when the IRS stopped preparing tax returns free in 1955. The firm has been hugely successful in that business – for a few months out of the year. Yet the firm has been mostly unsuccessful in other ventures seeking to earn revenues the rest of the year.

Its investment subsidiary, H&R Block Financial Advisors, arose from the Block’s purchase of Olde Financial Company in 1998 for $850 million. At the time Olde and its founder were in the midst of many regulatory and other woes, many of which Block inherited.

Claims Against Goldman Sachs for Alleged Fannie Mae Fraud Must Be Filed Individually

Published on: May 14, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Columbia dismissed class action claims against Goldman Sachs & Co. stemming from two Real Estate Mortgage Investment Conduit–or REMIC–deals with Fannie Mae.

Judge Richard Leon said that the plaintiffs–Fannie Mae investors–-failed plead a case which involved “direct acts” of securities fraud by Goldman. (In a court system friendly to those accused of securities fraud, claims are not allowed for aiding and abetting Federal Securities violations and class action claims involving securities fraud can no longer be filed under state laws.)

However, this court’s decision does not prevent members of the former class action from now seeking their own claim against Goldman in court or arbitration. Clients of Goldman who purchased shares of Fannie Mae during this period would likely have the stronger claims. Such claims could include aiding and abetting, conspiracy and other claims under state laws which were not allowed in the class action. Fortunately, statutes of limitations on individual claims are usually preserved while a class action case is pending in court.

A Warning on Risk in Securities backed by Commercial Mortgages

Published on: May 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the collapse of the subprime residential mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate as well.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these securities have issued warnings in the past, but last month they sounded a new note of urgency, saying that for the first time they would adjust their ratings to reflect their concerns.