Bloomberg

(Bloomberg) -- A UBS Group AG unit suffered a setback in a $2 billion lawsuit over allegedly defective mortgages after a judge said it violated contracts with three mortgage-backed securities trusts.

U.S. District Judge Kevin Castel Tuesday ruled that UBS Real Estate Securities Inc. had breached warranties on 13 of 20 loans that were introduced into evidence in a three-week trial in Manhattan in May. U.S. Bank N.A., acting as trustee, sued UBS over 9,342 of the 17,082 loans behind the securities, issued in 2006 and 2007, claiming they failed to follow established standards, including rules for borrower income, employment or home occupancy. U.S. Bank claims more than $2 billion in damages.

In a 239-page opinion, Castel ruled on a sample of 20 residential loans, deciding against UBS on most of them while narrowing the case against the bank as it goes forward. The judge said he will appoint special masters to review the remaining loans and recommend whether UBS must repurchase the loans or pay damages.

The UBS pools contained mortgages from lenders including Countrywide Home Loans Inc., IndyMac Bank F.S.B., American Home Mortgage Investment Corp. and MortgageIT Inc. Most of the loans were subprime, which carried a higher risk of default than prime loans.

Peter Stack, a UBS spokesman, and Cheryl Leamon, a spokeswoman for U.S. Bank, declined to comment on the ruling.

Bolster Leverage

Elliott Stein, a senior litigation analyst for Bloomberg Intelligence, said the ruling may bolster the leverage of other trustees that have sued over residential mortgage-backed securities.

"Though the court cautioned against extrapolating from that sample, it could result in liability on more than 6,000 of the 9,300 loans at issue in the suit," Stein said in an e-mailed comment. "Evidentiary issues may, however, result in further narrowing of the suit."

The case is U.S. Bank, National Association v. UBS Real Estate Securities Inc., 12-cv-07322, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net. To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Sophia Pearson

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