UBS Gets Some Reprieve As Judge Narrows $2B RMBS Case

UBS Group AG (NYSE:UBS) got some relief on Tuesday. A U.S. judge’s ruling narrowed down claims against the Swiss banking giant in a lawsuit related to $2 billion losses on residential mortgage-backed securities (RMBS) issued prior to the housing market meltdown. The lawsuit was brought against UBS Real Estate Securities Inc. by U.S. Bancorp (NYSE:USB) , on behalf of three trusts established for RMBS.

U.S. District Judge Kevin Castel stated that U.S. Bancorp has failed to show that UBS was intentionally ignorant toward deficiencies in many of the loans. Castel mentioned in his ruling, "The trusts have not proved that UBS took deliberate actions to avoid knowledge that widespread breaches had occurred throughout the loans held by the trusts, thereby triggering UBS's repurchase obligations."

The case centers on thousands of loans that UBS had acquired and later pooled into three trusts which issued securities, allowing investors to payments made by borrowers. The U .S. Bank, as trustee of the three trusts, alleged that UBS breached certain representations and warranties tied with 9,342 of the 17,082 mortgage loans that were pooled in the trusts. The plaintiffs sought more than $2 billion in damages.

Notably, in May 2016, in a non-jury trial in Manhattan federal court – Sean P. Baldwin – the trusts' lawyer stated that UBS had agreed that the mortgages underlying those securities would conform to certain standards. However, when deficiencies continued to appear, the bank refused to repurchase them.

Though Castel’s decision signaled some reprieve for UBS, the judge found that the UBS unit has violated certain contracts. Per the ruling, UBS would have to repurchase or pay damages for 13 out of the 20 loans examined by Castel, which were referred as "exemplar loans."

While currently there is no clarity regarding the number of loans that may call for repurchase or payment from UBS, the judge said that the court will appoint special masters who would review the thousands of loans underlying the securities, before arriving at the actual amount of required damages.

Castel noted, “The trial is over. With the exception of calculation of damages and withdrawal of claims of breach by the Trusts, the evidence is closed. But findings of fact and conclusions of law based upon the existing trial record remain to be made as to thousands of loans. The Court will outline the steps to advance this case to entry of final judgment.”

While the outcome of the case is uncertain as of now, any unfavorable ruling is likely to add to the legal woes of UBS. The company remains exposed to huge potential expenses from the case that may affect its financials.

Currently, UBS carries a Zack Rank #3 (Hold). A couple of better-ranked stocks in the foreign banks space include Banco Macro S.A. (NYSE:BMA) and Bank Itaú Unibanco Holding S.A. (NYSE:ITUB) , each sporting a Zacks Rank #1 (Strong Buy).

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