Claims related to mortgage backed-securities are far from over
Wells Fargo & Co.
). A group of bond investors including big names such as
) and PIMCO are pursuing them in order to seek buyback of allegedly
faulty mortgages associated with $73 billion of mortgage-backed
securities, according to a Wall Street Journal report.
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This group of investors, of which many reached an $8.5 billion
Bank of America Corp.
) last year, has accused Wells Fargo and Morgan Stanley of
nonperformance of duties related to buyback of loans in
private-label residential mortgage-backed securities. This
settlement with Bank of America still awaits court approval.
As a matter of fact, the loan repurchase requests coming from
private investors and government-sponsored enterprises have been a
matter of concern for a number of Wall Street biggies.
However, there are complicacies which bondholders need to counter
before getting the loan servicers to implement the representations
and warranties clause, which pledge that the loans have satisfied
the requirements as publicized. In fact, prior to requesting the
trustee for an enquiry, the bondholders or a group of bondholders
need to exhibit that they hold 25% of each type of security.
In this latest issue, the bondholders own at least a minimum of 25%
of voting rights on $15 billion and $5 billion of residential
mortgage backed securities issued by Wells Fargo and Morgan
Stanley, respectively. However, the settlement here will be
applicable to $45 billion of Wells Fargo residential mortgage
backed securities and $28 billion of Morgan Stanley bonds.
As a matter of fact, this issue of increased repurchase demands
associated with faulty loans underlying the mortgage-backed
securities is crippling the industry. Often, the settlements
arrived by the banks are aimed at reducing the legal hassles as
they include the involvement of both money and resources. However,
the settlement amount leads to the exhaustion of the company's
Nevertheless, we believe that the wrongdoers should be penalized
while the sufferers need to be compensated well. Otherwise, such
faulty practices would continue and deliver irrepairable damage to
the entire industry.
Both Wells Fargo and Morgan Stanley currently retain a Zacks #3
Rank, which translates into a short-term Hold rating.