U.S. judge cuts back $2 billion mortgage bond case against UBS

By Nate Raymond and Jonathan Stempel

Logo of Swiss bank UBS is seen on a building in Zurich Thomson Reuter

Logo of Swiss bank UBS is seen on a building in Zurich Thomson Reuter

NEW YORK (Reuters) - A U.S. judge signaled on Tuesday that UBS AG may escape liability for at least a portion of an estimated $2.1 billion of losses stemming from residential mortgage-backed securities it sold in 2006 and 2007 before the U.S. housing market collapsed.

In a 239-page decision, U.S. District Judge Kevin Castel in Manhattan said U.S. Bancorp, as trustee for three trusts issuing the securities, did not show that UBS was willfully blind toward deficiencies in many of the loans.

"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," Castel wrote.

Castel nonetheless said UBS had been put on notice about some problem loans, and would need to repurchase or pay damages on 13 out of 20 he examined.

The judge directed the hiring of a "lead master" to review thousands of loans underlying the securities, before determining the extent to which damages might be warranted.

Representatives for UBS and US Bancorp declined to comment.

The decision follows one of a handful of trials, which Castel heard without a jury, over whether investment banks misled investors about the quality of mortgage-backed securities, a main factor in the 2008 financial crisis.

UBS was previously sued by bond insurer Assured Guaranty Ltd, which was represented by the same lawyers representing US Bancorp, and settled that case in 2013 for $358 million.

At the nearly month-long trial, which ended in May, US Bancorp said UBS breached contractual promises regarding the quality of 9,342 of the 17,082 mortgage loans.

Many of the loans had been issued by lenders specializing in riskier loans, including the former Countrywide Financial Corp, IndyMac Bancorp and American Home Mortgage Investment Corp.

In his decision, Castel also rejected several of U.S. Bancorp's other claims, including its proposed method for finding that some loans' loan-to-value ratios were incorrect.

UBS has said the trustee sought to prove liability for 1,630 loans solely with that method.

Following the trial, US Bancorp narrowed its case to focus on 7,428 loans, UBS said in a court filing.

The number of loans on which UBS might still be liable following Castel's decision was not immediately clear.

The case is US Bank NA v. UBS Real Estate Securities Inc, U.S. District Court, Southern District of New York, No. 12-07322.