Assured Guaranty (AGO) filed suit against Credit Suisse (CS) last week. Here is a copy of the complaint. AGO wants CS to repurchase $1.8 billion in defective mortgage loans. The underwriting standards for these loans were just as egregious as what we’ve seen with the likes of Countrywide and WaMu. Approximately 93 percent of the 7,918 mortgage loans that Assured has reviewed breached one or more of the Mortgage Representations.
In the court filing there are lots of great examples of the lack of underwriting standards. One example of CS failing to fully investigate the borrower’s existing debt obligations: a re-underwriting of a $269,500 mortgage loan revealed that the borrower opened six mortgages totaling $1.7 million within 30 days of the subject mortgage loan’s closing date—a recalculation of the debt to income ratio yielded 135% which exceeds the max allowable DTI ratio of 60%.
Another excellent example is in regards to a failure to verify income. One borrower obtained a $479,900 mortgage loan claiming to be the owner of a maintenance and painting business with income of $358,800 per year. It turns out the actual income was $46,959 which gives a DTI ratio of 327%, exceeding the max allowable ratio of 60%—over 5 times the limit!
I suspect in the next 6–12 months there will be a settlement very similar in structure to the recent Bank of America/Countrywide settlement, meaning that AGO will likely receive about $1 billion in cash up front and another several hundred million later on along with some type of reinsurance or indemnity agreement.
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