UBS urges judge not to hold it liable for mortgage bond losses

By Nate Raymond

NEW YORK (Reuters) - UBS AG (UBSG.S) urged a U.S. judge on Friday to reject claims that it should be held liable for $2 billion (£1.4 billion) in losses that investors incurred on mortgage-backed securities issued before the collapse of the U.S. housing market.

Lawyers for UBS made their closing arguments in the non-jury trial in Manhattan federal court in a lawsuit being pursued by U.S. Bancorp (USB.N) on behalf of three trusts established for mortgage-backed securities.

Sean Baldwin, the trusts' lawyer, said UBS turned a blind eye to defects in the mortgages it acquired and packaged into bonds to be sold to investors, relying on vendors hired to do due diligence on the loans whom it considered "negligent or lazy."

"It was a business decision, but it should be held accountable for that business decision," he said.

But Robert Fumerton, a lawyer for UBS, said while the trusts contended thousands of loans were defective under the governing contracts, they had failed to establish those defects were material.

"Not all breaches of the guidelines and not all breaches of the representations and warranties are material," Fumerton said.

The case, being heard by U.S. District Judge Kevin Castel, is one of a handful to go to trial in recent years over losses incurred on mortgage-backed securities, the financial product at the centre of the 2008 financial crisis.

The lawsuit follows a related action against UBS by bond insurer Assured Guaranty Ltd (AGO.N) over the same mortgage-backed securities. UBS in 2013 agreed to pay $358 million to Assured, which was represented by the same lawyers as the three trusts.

The lawsuit centred on thousands of loans that UBS acquired that were originated by lenders including Countrywide Financial Corp, which it then pooled into three trusts that issued securities entitling investors to payments made by borrowers.

Out of 9,411 loans at issue, 7,440 had realized losses after being liquidated or modified, and that another 768 were over 60 days delinquent, Baldwin said.

Many of those loans were materially defective and were packaged into the securities despite "red flags" of potential borrower fraud, he said. He pointed to two loans that claimed to be owner-occupied despite being issued to a single person.

"The loans should not have been approved, and the breaches could not have been compensated for," he said.

At the trial's start, Baldwin said $2.1 billion in losses resulted, for which the trusts are seeking to hold UBS liable.

The case is Mastr Adjustable Rate Mortgages Trust 2006-OA2 et al v. UBS Real Estate Securities Inc, U.S. District Court, Southern District of New York, No. 12-07322.