Foreclosure Skeletons Coming Out Of Cupboards

June 18th, 2008

The mudslinging has started. Foreclosure skeletons that had so far been rattling in the cupboard have started to come out. Buffalo based M&T has started to take legal proceedings against the mighty German financial body – the Deutsche Bank. The international banking powerhouse has been accused of intentionally selling M&T unsafe mortgages as investments. M&T aims to recover $182 million in losses and damages.

During the fourth quarter of last year M&T suffered damages on three tiers of mortgage-backed securities. At that point of time foreclosure houses were aggressively making their presence felt across the nation. There were massive losses not only for lenders but also for those holding investments.

Specifically the fraud lawsuit filed on Monday in the Erie County Supreme Court is concerned with two investment securities M&T had bought from the aforesaid bank in February 2007. M&T was under the impression that it would fetch higher returns than if it had been invested in Treasury Bills or in any other commercial debt issued by companies even like GEC. These collateralized debt obligations consisting of many layers of securities were ultimately founded on the bedrock of sub-prime mortgages. These were house loans advanced to those who had bad credit ratings. The investments were not done blindly. These were highly rated by two big debt rating agencies – Standard & Poor and Moody’s Corpn.

M&T claims that they were deceived into thinking that the two securities were ‘safe, secure and nearly risk-free’. It appeared to be safer than even corporate debt and as safe as Treasury Bills. The suit alleges that at that time the bank knew that trouble was brewing because of its underwriting practices and fall in diligence standards. Sub-prime had already started making painful noises from 2006 and it was spilling on to 2007. Moody and S&P were also charged for going hand in hand with these fraudulent practices. All this has caused M&T to cut down the value of all three investments from $132 million to a mere $4.4 million – all this within a year of purchase. If M&T had known the true facts they would not have gone ahead with the purchase. The suit ran into 51 pages.

The target is to recover initial cost of the two securities ($82 million approximately) with interest and $100 million as compensation. This particular lawsuit does not include the third security valued around $50 million. It was purchased by M&T from another party.