Attorney General Eric Schneiderman announced today a federal lawsuit against three major mortgaging corporations for making fradulent misrepresentations and ommissions to promote the sale of residential mortgage-backed securities to investors.
The lawsuit — against J.P. Morgan Securities LLC (formerly known as Bear Stearns & Co. Inc.), JP Morgan Chase Bank, N.A., and EMC Mortgage LLC (formerly known as EMC Mortgage Corporation) — is the first initiated by a state-federal task force President Barack Obama created to expose abuses in the mortgaging industry, of which Schneiderman is co-chair.
According to Schneiderman’s lawsuit, these defendants deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to Bear Stearns & Co.’s collapse in early 2008, incurring losses that have totaled approximately $22.5 billion to date.
“This lawsuit will bring accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,” Schneiderman said in a statement. “Our lawsuit demonstrates that there is one set of rules for all — no matter how big or powerful the institution may be — and that those rules will be enforced vigorously.”
Schneiderman’s complaint states that Bear Stearns led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored. The complaint alleges that Bear Stearns did neither.
According to the complaint, the company systematically failed to evaluate the loans, largely ignored defects that its limited review uncovered and kept its investors in the dark about the inadequacy of the review procedures and defects in the loans. Even when Bear Stearns executives were made aware of these problems, the company failed to reform its practices or disclose material information to investors, according to the complaint.
As a result, the loans in Bear Stearns’ mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans or were very likely to default, and they ultimately did default in large numbers, according to an attorney general’s office news release.
“We believe that this is a workable template for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes,” Schneiderman said. “We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors.”