Troubles emanating from mortgage backed securities are far from
Deutsche Bank AG
). A trustee for mortgage-bond investors has charged one of the
units of Deutsche Bank for over $183 million in faulty loans
underlying the securities, according to a Bloomberg report.
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The trustee, HSBC Bank of the
HSBC Holdings Plc.
), has alleged that DB Structured Products has violated its pledge
regarding the quality of loans that were clubbed together and
securitized. HSBC is looking for an order that would result in
buyback of loans by DB Structured Products.
As a matter of fact, last month, DB Structured Products was sued by
Federal Housing Finance Agency (FHFA) over mortgage backed
securities, according to a Bloomberg report.
In a court filing, FHFA alleged that Deutsche Bank's unit violated
its promise regarding the loans that were clubbed together and
packaged into securities and also failed to buy them back as
needed. The investment amount in consideration was, however, not
disclosed in the court filing.
The Back Story
In the aftermath of the real estate market collapse in 2008 and the
financial crisis, mortgage and mortgage-backed securities occupied
a significant share of the total financial system. In several
situations, the legitimacy of the mortgages as well as the
documents were ambiguous. The mortgage originators did not exercise
due diligence in several cases and also deliberately defrauded.
Now, when banks sell mortgage-backed securities to investors and
GSEs, there is a clause that can force a bank to buy back the
securities in the event of fraudulent or faulty underwriting or
origination of the underlying mortgage. Therefore, in cases of
fraudulent and faulty origination documents, the holder of the
mortgage-backed securities can demand buybacks by the seller of the
Moreover, it has been found that in many cases the buyers of the
mortgage backed securities were misinformed about the quality of
the underlying loans of the securities and they were found to be
more risky than claimed.
We believe that increasing demand for loan buybacks would remain a
headwind in the quarters ahead for Deutsche Bank. Moreover, such
suits would result in piling of litigation risks for Deutsche Bank,
which poses a menace for both the company's image as well as it
As a matter fact, a number of the Wall Street stalwarts such as
Wells Fargo & Co.
PNC Financial Services Group Inc.
), are witnessing similar escalation in mortgage buyback demands.
These companies have substantially beefed up their reserves for the
Deutsche Bank currently retains a Zacks #4 Rank, which translates
into a short-term Sell rating.