Pass-Through Certificates Wrongly Certified; Lawsuit

The assets used to underwrite several securitization series put together by parties affiliated with Morgan Stanley Capital are now the focus of litigation by pass-through certificate investors who claim underwriting did not meet proclaimed standards. While the series passed SEC regulations, the class action lawsuit bought by Coughlin Stoia Geller Rudman & Robbins claims the registration statement omitted and/or misrepresented the fact that sellers of the underlying mortgages to Morgan Stanley Capital were issuing many of the mortgage loans to borrowers who did not meet the prudent or maximum debt-to-income ratio purportedly required by the lender or provide adequate documentation to support the income and assets required for the lenders to approve and fund the mortgage loans pursuant to the lenders’ own guidelines. The suit also claims borrowers were steered to stated income/asset and low documentation mortgage loans by lenders, lenders’ correspondents or lenders’ agents, such as mortgage brokers, because the borrowers could not qualify for mortgage loans that required full documentation. In addition, the investors say borrowers did not have the income required by the lenders’ own guidelines to afford the required mortgage payments which resulted in a mismatch between the amount loaned to the borrower and the capacity of the borrower. The case seeks to recover damages on behalf of so-called pass-through certificate investors. In ABS payments are made to third parties via pass-through certificates in which investors are compensated according to the rating of each traunch. Housing Wire is currently unclear as to the status of the lawsuit, but can confirm the claim that the SEC approved the regulatory structure of the series in question. Coughlin Stoia is asking that anyone involved with this series contact them by the first week in June. Write to Kelly Curran.