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Subprime Mortgage 'Bundler' to Pay Nevada $42 Million

Subprime Mortgage 'Bundler' to Pay Nevada $42 Million

RBS Financial Products bought subprime mortgages and packaged them into securities

October 28th, 2012 by Mark Huffman of ConsumerAffairs in News

Mortgage lenders who made high-interest rate loans to home buyers who couldn't afford them have come under regulatory pressure. Now, so has a company that purchased those loans and packaged them into securities.

Nevada Attorney General Catherine Cortez Masto has announced a $42 million settlement with RBS Financial Products (RBSFP) to resolve an investigation into the firm's role in purchasing and securitizing subprime and payment option adjustable rate mortgages in her state.

The agreement requires RBSFP to commit to certain changes in its practices to the extent it securitizes Nevada mortgages and to pay the State $42 million to be used for payments to affected borrowers, mortgage fraud enforcement, foreclosure prevention and attorney's fees and costs.

Holding 'players' accountable

"I remain committed to enforcing Nevada's laws against the players --including those on Wall Street -- that contributed to and profited from reckless and deceptive mortgage lending in Nevada," said Masto. "The payment from RBS will alleviate some of the injury to the Silver State and its residents. The changes to its securitization process should help make sure that we do not go down this road again."

Nevada was at ground-zero of the housing market collapse. The state recorded among the highest percentage of foreclosures in the nation, primarily because so many homes in Las Vegas and other cities were financed with subprime mortgages.

Subprime mortgages, bundled into securities and sold to hedge funds and other investors, were attractive investments because they paid a high return. But when homeowners began to default on those loans, the securities became "toxic" because it was difficult to determine which securities contained bad loans.

Misrepresentations by lenders

Nevada's nearly two-year investigation centered upon potential misrepresentations by lenders, including Countrywide and Option One, to Nevada consumers who took out subprime loans and payment option ARMs that were bought and securitized by RBS between 2004 and 2007. These include whether lenders deceived consumers about the actual interest rate and payments on their loans, the appraised value of their property, and the potential payment shock when the initial "teaser" rate on their mortgages expired.

Masto said she was concerned that many borrowers who took these loans did not understand the likelihood that they would not be able to repay their loans or that they would have to refinance the loan before the payment increased. She also examined the extent to which RBS was aware of the lenders' allegedly deceptive practices through its due diligence process when it bought the loans and whether RBS substantially assisted these lenders by financing and purchasing their loans.

Compensating homeowners

Part of the $42 million settlement will go to consumers whose subprime mortgages were purchased and packaged by RBSFP. For now, these borrowers do not need to do anything in order to obtain the benefits of the settlement as the distribution plan for eligible recipients is still being finalized, Masto said. Borrowers eligible for relief should periodically visit for information.

Only borrowers whose loans were financed or acquired by RBS are covered by this settlement.