UBS to pay $1.4 billion over fraud in residential mortgage-backed securities

Swiss bank UBS agreed to pay a combined $1.4 billion in civil penalties over fraud and misconduct in its offering of residential mortgage-backed securities dating back to the global financial crisis, federal prosecutors announced Monday.

The bank, in its own statement Monday, described the settlement as dealing with a “legacy matter” dating from 2006 to 2007, leading up to the financial crisis.

The settlement concludes the final case brought by the U.S. Department of Justice against several of the largest financial institutions over misleading statements made to the purchasers of those mortgage-backed securities. The cumulative recoveries in the cases now total $36 billion, according to the Justice Department.

UBS’ settlement is nearly the same as the value of the residential mortgages it originated between 2005 and 2007, the year it stopped issuing residential mortgage-backed securities. UBS originated $1.5 billion in residential mortgages in those three years, the bank previously said in a 2018 statement challenging the Justice Department allegations.

“The vast majority of loans underlying the 40 RMBS listed in the complaint were originated by other financial institutions,” UBS said at the time.

In the years leading up to the financial crisis, investment banks packaged, securitized and sold bundles of mortgages to institutional buyers. Those securities were rated and graded according to quality, with various “tranches” of mortgages hypothetically safeguarding against the risk of complete default.

But unbeknownst to the buyers, those mortgages were not as high quality as their ratings suggested. UBS, similar to other banks who settled with the Justice Department, were aware that the mortgages underneath the mortgage-backed securities didn’t comply with underwriting standards.

UBS conducted “extensive” due diligence on the underlying loans before it created and sold the securities to its clients, prosecutors alleged, and despite knowing of the significant issues with the products, continued to sell them to financial success.

UBS had previously said that it had “fulfilled” its obligations to its clients, which the bank said were “highly sophisticated investors” and “some of the biggest financial institutions in the world.

The Justice Department has secured settlements with 18 other financial institutions over mortgage-backed security issues, including Bank of America, Citigroup, General Electric, Goldman Sachs, JPMorgan and Wells Fargo.

Credit Suisse, the defunct Swiss bank now owned by UBS, also settled with the Justice Department over misconduct related to MBS offerings.