Prudential’s RMBS Lawsuit Against Bank of America Survives Motion to Dismiss

Prudential Insurance Co.’s (PRU) residential mortgage-backed securities lawsuit against Bank of America (BAC) made it through a motion to dismiss with most of the claims made intact. The insurance company is accusing BofA of selling it $2 billion in bogus RMBS.

Prudential contends that based on its own analysis of close to 21,000 of the mortgage loans backing the RMBS certificates, they don’t see a match up with the representations that the bank and Merrill Lynch made about the certificates. Several subsidiaries are also making similar claims against BofA and its Merrill Lynch entities.

Prudential says that Merrill and Lynch and Bank of America abided by underwriting guidelines that established the rules to determine whether to securitize or grant a particular loan. However, the insurer says that while the other two said they would only exempt loans with compensating factors, they granted loan exceptions repeatedly even when these factors didn’t exist. In its securities fraud case, Prudential contends that if exceptions were given when compensating factors were lacking, then that the quality of the collateral behind the certificates was badly compromised.

In his decision, U.S. District Judge Stanley R. Chesler partially granted bank of America’s motion to dismiss the RMBS case due to a failure to make a valid relief claim. He also threw out the fraud claims. However, Chesler left in the majority of other claims, including those involving equitable fraud, underwriting abandonment theory, and common law fraud.

In another RMBS fraud lawsuit, Bank of America agreed to pay up to $950 million to resolve claims by the Financial Guaranty Insurance Co. and a group of investors. Financial Guaranty will get $584 million because it backstopped the securities and was forced to make good on the bond payments when the mortgages went bad.

The bond insurer sued both Countrywide Financial and BofA after the latter acquired Countrywide in 2009. Financial Guaranty claims that the mortgage giant fraudulently induced it to cover its RMBS transactions when it misrepresented the quality of the assets behind them. The insurance company contends that when the economy tanked, mortgage delinquencies went up, and securitization was compromised, it was left accountable for hundreds of millions of dollars in liabilities.

Prudential’s $2B RMBS Suit Against BofA Mostly Survives, Law360, April 17, 2014

BofA Reaches $950 Million Deal on FGIC-Backed Bonds, Bloomberg, April 16, 2014

More Blog Posts:
JPMorgan Will Pay $614M to US Government Over Mortgage Fraud Lawsuit, Stockbroker Fraud Blog, February 8, 2014

New Jersey Files Securities Lawsuit Against Credit Suisse Over $10B in MBS Sales, Stockbroker Fraud Blog, December 20, 2013