Wells Fargo Suit against JP Morgan Highlights Rampant Missreps in Bear Stearns RMBS

Wells Fargo is fighting back for investors in a toxic 2007 Bear Stearns mortgage security. On Wednesday, the bank acting on behalf of investors as the trustee of the security, filed a breach of representations suit against J.P. Morgan and its subsidy EMC. The suit is over $560 million of loans investors believe should be repurchased because they did not measure up to what the pool and servicing agreements said they would be. The security showed early signs of default which is strong evidence originators did not follow under writing standards laid out in the P&SA.

Court documents filed in Delaware Chancery Court shows the Trustee first asked for loan level documents related to the security in August 2010. EMC refused to turn them over so Wells Fargo sued in January to get access to loan level details of the residential mortgages that made up the security. Landis Rath & Cobb , attornies for EMC, played some dirty legal tricks to avoid turning over this data even though Wells, as trustee, has a contractual right to it.

Wells said they initiated the litigation after RMBS noteholders, who owned more than 25% of the certificates in the trust, asked them to investigate the nature of the loans. Wells then hired a third party firm, Barrent Group; to run a forensic accounting of the loans and found around 800 of them grossly misrepresented the underlying mortgages. Wells, as trustee, says EMC has to buy back the loans now because they don’t meet underwriting standards.

The security in question, Bear Stearns Mortgage Funding Trust 2007-AR2, was packed with Alt-A loans bought from Quicken, EMC Mortgage Corp, and Bear Stearns Residential Mortgage Corporation that would have been sold through Mike Nierenberg’s trading desk. Nierenberg is now head of mortgages at Bank of America and the subject of multiple fraud suits against his former employer Bear Stearns.

Wells says the third party review of the loans shows about half of the 2000 loans in the trust were refinancing on existing mortgages. Instead of EMC using the sale price of the home, the values assigned to the property was based solely on the appraised value. When the homes were later sold it was for below the appraised values at refinancing. EMC is subject to multiple lawsuits detailing the lack of due diligence in their securitization and analysis process.

J.P. Morgan picked up ownership of EMC when it bought Bear Stearns in 2008 and assumed their liabilities. Last month the FHFA filed a suit against JPM/Bear/EMC loaded with some pretty serious common law fraud claims against Bear executives including Nierenberg. The Wells Fargo suit doesn’t list a fraud claim or security law violations so far, which means they can’t ask for punitive damages.

Wells spokesperson, Elise Wilkinson, says this is the largest RMBS putback case the bank has brought acting as a trustee.

In 2007, Moody’s believed that the mortgage losses to the deal would be basically less than 1% of the original principal balance of the mortgage loans (0.85%-1.05%). This would have corresponded to credit enhancement of about 8-10% for the Aaa bonds and about 3% for the Baa2 bonds.

Many asset-backed traders expect these sorts of option ARM deals to incur about 20-30% of cumulative losses to original principal balance when they are done. Which would mean Moody’s was off by a factor of 20-30 times.

In May 2010, I reported for The Atlantic EMC whistleblowers said they were directed by the Bear Stearns mortgage team, working under Tom Marano, to make up loan level detail for the raters before they issued a rating on the bond. Three months latter large investors began presuring Wells Fargo to use its power as trustee and force EMC/JPM to show them what they really knew about the construction of the collateral in the security.

Wells Fargo’s attorney Tom Bayliss of Delaware-based Abrams and Bayliss declined to comment on the lawsuit. JPM/EMC has not picked counsel yet for this case.


Enter your email address to subscribe to TeriBuhl.com and receive notifications of new articles by email.


  1. Jimmy Taylor says

    Thank You for the nicely written of piece of info about accounting practises!

    Please write more, I’ll be checking back every couple of days!


Share Your Voice

This site uses Akismet to reduce spam. Learn how your comment data is processed.