Germany Wants its U.S. Mortgage Money Back: Street Whispers

NEW YORK ( TheStreet) -- Germany's inevitable bailout of Europe may be partially funded with money won in U.S. courts against big U.S. banks.

Reuters reported on Wednesday that IKB Deutsche Industriebank AG sued Citigroup ( C) for making "material misrepresentations" related to $137.4 million in mortgage-backed securities, while separately suing Goldman Sachs ( GS), over $73.2 billion in MBS. IKB claimed it took losses when selling the securities.

Also on Wednesday, Reuters reported that UBS AG ( UBS) sued Sealink Funding Ltd. over $158.1 million in MBS.

This is just the latest German bank to sue their U.S. counterparts. Many of Germany's government-backed "Landesbanks" have suffered major losses as a result of bets on the U.S. housing market made prior to the financial crisis.

"Certainly a lot of major investors were German enterprises and there's a certain amount of follow the leader going on now too," says Donald Hawthorne -- a partner in the Litigation and Regulatory Group of Axinn, Veltrop & Harkrider LLP. "It is a good opportunity for these companies, as these claims are a wasting asset."

A steady stream of similar German bank lawsuits -- also filed in New York State Supreme Court -- against issuers of mortgage-backed securities, including (but certainly not limited to):
  • A suit in February brought by DZ Bank AG -- Germany's fourth largest bank -- against JPMorgan Chase (JPM), saying that it purchased $85 million in MBS from JPMorgan based on flawed offering materials, and another suit by DZ Bank against HSBC (HBC), claiming misrepresentations and omissions in offering materials, on $122 million in MBS purchases.
  • A suit by brought in April by HSH Nordbank AG against two subsidiaries of Barclays PLC (BCS), claiming Barclays misrepresented the quality of loans underlying $46 million in mortgage-backed securities.
  • An April lawsuit by Bayerische Landesbank -- one of eight German Landesbanks that are primarily owned by German state governments -- against Deutsche Bank AG (DB), accusing Deutsche Bank of committing fraud while selling $810 million in residential MBS.
  • A lawsuit filed in May by Bayerische Landesbank against Merrill Lynch -- acquired by Bank of America (BAC) in January 2009 -- accusing Merrill of making misrepresentations in offering materials for $324 million in residential MBS.
  • Separate suits filed against Barclays in June by Sealink Funding and Landesbank Baden-Wuerttemberg Sealink claiming that Barclays made misrepresentations related to the sale of $604 million in MBS, while Landesbank Baden-Wuerttemberg claimed misrepresentations on $205 million in mortgage paper.

"New York has a fairly long statute of limitations for fraud claims," adds Hawthorne, who says that "absent a tolling agreement, you are looking at a six-year statute of limitations" for mortgage-backed securities lawsuits, meaning that time is running out for soured deals that were made in 2006.

When asked why some investors seem to have waited until the last minute to file suit, Hawthorne says "there's a reluctance among major financial institutions to sue each other."

"The reason they are resorting to litigation is that they have discovered that litigation works in the RMBS arena."

"We've seen some big settlements recently," which include Bank of America's settlement in July with bond insurer Syncora Guarantee for $375 million.

Syncora was represented by Axinn, Veltrop & Harkrider -- with Hawthorne as the lead counsel -- and also by Debevoise & Plimpton, with the plaintiff, claiming that Countrywide Financial -- acquired by Bank of America in 2008 -- had committed "fraud and breach of contract arising from financial insurance provided for over $6 billion in residential mortgage-backed securities."

Four years on from the financial crisis, Bank of America continues to see its mortgage repurchase claims grow, although the company has set aside major reserves to cover expected putback and legal costs, mainly springing from the disastrous purchase of Countrywide.

During the second quarter, Bank of America's total mortgage repurchase claims increased by 41% to $22.7 billion as of June 30.

The statute of limitations is running out for 2006 MBS deals, but mortgage loans continued to be packaged during 2007, so we can expect to see the flurry of lawsuits to continue for at least another year.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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