Wells Fargo (WFC) Sued by NCUA over Sale of Risky RMBS - Analyst Blog

Major American banks continue to be embroiled in legal hassles related to the sale of risky residential mortgage backed securities (“RMBS”). The U.S. regulator for credit unions – National Credit Union Administration (NCUA) – has sued Wells Fargo & Company (WFC) for recovering losses on $2.4 billion worth of RMBS that turned bad.

The case, filed in a federal court in New York, pertains to the sale of 27 RMBS trusts to five corporate credit unions between 2004 and 2007.

Wells Fargo has been accused by the NCUA of failing to diligently perform its duties as a trustee. Per the lawsuit, the mortgage loans that backed the securities were of poor quality as these loans incurred heavy delinquencies and credit losses, which ultimately resulted in huge losses for the investors. This could have been prevented if U.S. Bank was true to performing its duties. Also, the NCUA accused Wells Fargo of ignoring the underwriting guidelines specified in the offering documents.

As a result, when these RMBS lost their value owing to defaults in the underlying assets, the value of the investments of the credit unions in these securities also suffered a decline. Subsequently, all five credit unions collapsed, triggering a crisis in the credit union industry. However, Trisha Schultz – the spokeswoman for Wells Fargo said, "We strongly disagree that Wells Fargo is in any way responsible for any losses incurred on these transactions."

Wells Fargo is not the only major global bank to be sued by the NCUA. Recently, Bank of America Corporation (BAC) and U.S. Bancorp (USB) were sued by the NCUA for recovering losses on $5.8 billion worth of RMBS. In 2013, the regulator had sued nine banks including Morgan Stanley (MS) and Barclays PLC.

We believe that such cases are inevitably going to result in mounting litigation risks for Wells Fargo, which is already facing substantial legal headwinds. On the other hand, recoveries by the NCUA will lower the losses that stemmed from the failure of the credit unions.

Currently, Wells Fargo holds a Zacks Rank #3 (Hold).