New methods for tying losses on pension plans to defaults on poorly underwritten residential mortgage-backed securities (RMBS) have paved the way for Virginia and other states to bring lawsuits against mortgage lenders.
Virginia is suing 13 banks, including Citigroup, Bank of America and Goldman Sachs, for $1.15 billion over claims the institutions misled the state's retirement system about the sale of faulty RMBS.
The securities in question were purchased between 2004 and 2010; however, Virginia was forced to sell the vast majority of them, resulting in losses of about $383 million, according to a press release on state attorney general's website.
As per Virginia state law, the state can seek triple the damages from the lenders. In addition, it is seeking civil penalties of $5,500 to $11,000 per violation, making the suit ‘the largest financial fraud action ever brought by the Commonwealth of Virginia,’ according to the state's release.
Interestingly, the lawsuit was filed under the Virginia Fraud Against Taxpayers Act by a technology firm that reportedly created an algorithm that enables pension fund owners to match properties with defaulted loans to security offering documents within a portfolio.
Integra REC's technology allows fund owners to trace loan-level misrepresentations to specific RMBS tranches, according to a Bloomberg news report. From there, a fund owner can determine the degree of loss resulting from mortgage defaults.
Under Virginia law, Integra stands to gain 15% to 25% of any money recovered, according to the report. What's more, the firm's software could be used by other states to bring similar suits. The rest of the money is to be returned to taxpayers.
Integra REC's analysis shows that almost 40% of the 785,000 mortgages backing the securities in Virginia's retirement portfolio were fraudulently misrepresented in a way that made them a significantly higher risk for default, according to the state's release. Distortions included understating the number of loans with high loan-to-value ratios, and misrepresenting owner-occupancy rates and the percentage of homes with second mortgages.
‘The message today is clear,’ Virginia Attorney General Herring says in the release. ‘It doesn't matter if you're a small-time con artist or a multibillion-dollar Wall Street bank. If you try to rip off or defraud Virginia consumers or Virginia taxpayers, you will be caught, and you will be held responsible.
‘Every Virginian was harmed by the financial crisis,’ Herring adds. ‘Homes were lost, retirement accounts were devastated, small businesses saw their credit dry up almost overnight, and state and federal budget cuts hurt vulnerable Virginians. It will take many more years to recover the economic strength and stability we lost, but I will not allow Virginians to be left holding the bag for the reckless, fraudulent business practices of a few big banks [that] thought they were above the law. These banks lied to Virginia, and taxpayers and state employees lost hundreds of millions of dollars as a result.’