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RBS to Pay $13 Billion as Settlement in MBS Case?

zacks.com | July 7, 2015

According to U.S. regulators, U.K. – based The Royal Bank of Scotland Group plc (RBS - Snapshot Report) might have to pay a total amount of $13 billion over presenting misleading information in the selling of mortgage-backed securities (MBS). The case is presently underway in the Connecticut court.

The bank has been accused by the Federal Housing Finance Agency (‘FHFA’) of providing fraudulent details regarding MBS sold to the government-backed mortgage financiers, Federal National Mortgage Association or Fannie Mae (FNMA - Snapshot Report) and Federal Home Loan Mortgage Corp. or Freddie Mac (FMCC - Snapshot Report).

However, the U.K. government, which targeted privatization of RBS later this year might face hurdles in the same due to ambiguity regarding the penalty. Notably, 1.9 billion pounds ($3 billion) have been kept as provisions by RBS to resolve the claims associated with the sale of mortgage-backed debt worth $32 billion in the U.S.

Both RBS and U.K. Financial Investments Ltd, manager of the government’s bank stakes, declined to comment.

Philippe Selendy, a lawyer for Quinn Emanuel estimated the amount of $13 billion as settlement in a filing on Jun 24 in the U.S. District Court for the Southern District of New York RBS in a different case associated with MBS.

Notably, in 2011, FHFA hired Quinn Emanuel for a case concerning the global financial giant – Nomura Holdings, Inc. and RBS in which the banks have been accused of providing fraudulent details regarding MBS. According to the order, the companies have to pay $26.6 million to Fannie Mae and $779.4 million will be paid to Freddie Mac.

Many financial institutions resorted to inappropriate, misleading, aggressive and fraudulent methods to boost their mortgage operations during the pre-crisis period that fuelled the sub-prime mortgage crisis. Consequently, Freddie Mac and Fannie Mae reached the brink of bankruptcy and the government intervened to rescue these lenders.

In order to avoid such dire situations in the future, the regulators started implementing stringent restrictions. Consequently in 2011, the FHFA sued 18 financial organizations, including Wall Street majors like The Goldman Sachs Group, Inc. (GS) and Bank of America Corp. (BAC) for selling faulty mortgage-backed securities to Freddie Mac and Fannie Mae that caused investors severe losses. FHFA has reached nearly $17.9 billion in settlements with several of these banks.

Bottom Line

While the FHFA continues to successfully resolve issues as well as safeguard the interests of investors, such litigations and probes can adversely impact the banks’ goodwill, besides jeopardizing their financial performance with fines and settlement charges. Moreover, in case the distressed securities are transferred to the accused banks, asset quality can face severe deterioration.

RBS currently carries a Zacks Rank #3 (Hold).

 

Back to July 2015 Archive

 

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