Lawsuit Links Bad Underwriting, Investor Loss at IndyMac

A class-action lawsuit alleges IndyMac Federal Bank failed to meet its own underwriting guidelines on certain securitized mortgage loans. The suit points toward substantially higher rates of delinquencies and foreclosures on collateral for these highly-rated debt issues. As a result of the collateral’s poorer-than-estimated performance, the complaint says, underwriter rating agencies had to downgrade a number of pass-through certificates, forcing a substantial decline in their value and loss to investors who purchased the certificates. Pass-through certificates involve the distribution of principal and interest payments through the system from borrowers to certificate holders. Morgan Stanley Capital earlier this week became the focus of another lawsuit regarding pass-through certificates. The IndyMac case is only the latest step in a history of trouble at the thrift. The Federal Deposit Insurance Corp. took over IndyMac last July and arranged its sale to a consortium of private equity investors. The sale completed in March, but not before the FDIC discovered an additional $10bn in previously-unknown liabilities related to problematic mortgage loans sold to Fannie Mae (FNM). Despite the road blocks, the sale eventually finalized, including 33 branches, a reverse mortgage unit and a $176bn residential mortgage servicing portfolio. IndyMac at the end of January held $23.5bn in assets and $6.4bn of deposits. Kohn, Swift & Graf and Wolf Haldenstein Adler Freeman & Herz filed the suit on behalf of all purchasing parties. Buyers of any certificates listed in the suit have until July 13 to request the appointment of lead plaintiff in the case. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.