Barry Ritholtz links to a complaint from MBIA, the insurance company, against Morgan Stanley over second lien securitization. MBIA is suing over breach of contract on a securitization known as MSM 2007-9SL, a pool of 5,000 second-lien loans. “Based on demonstrably false written representations during the pre-deal negotiations, Morgan Stanley fraudulently induced MBIA to issue insurance on $223,194,000 worth of securities,” according to the complaint, which you can view here. The complaint was filed in New York State Supreme Court.
Basically, MBIA is saying there were defective loans in that mortgage pool, that Morgan Stanley never “cured” them by repurchasing the bad loans, and as a result, MBIA is losing money on the insurance. So they sued. The false representations made by Morgan Stanley, according to MBIA, include underwriting standards at the point of origination of the loans, and the “characteristics of the securitized loan pool in the aggregate.” Basically, Morgan Stanley lied about the quality of the loans, according to MBIA. They have proof from third-party due diligence of the loan pool, which they got from Morgan Stanley after the default rates skyrocketed. And under the pooling and servicing agreement, they were required to put back those loans on their books. But Morgan Stanley hasn’t repurchased a single loan.
From: http://ping.fm/4kwnH
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