FINRA Press Release: Subprime Securitizations

FINRA Fines Credit Suisse Securities $4.5 Million and Merrill Lynch $3 Million for Misrepresentations Related to Subprime Securitizations

The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that

"it has fined Credit Suisse Securities (USA) LLC $4.5 million, and Merrill Lynch $3 million for misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations (RMBS)."

The settlement is detailed in the FINRA AWC No. 2008012808901 and the FINRA AWC No. 2008012808201.

Misrepresentations of this kind have happened before, such was the case with Deutsche Bank Securities, which was fined $7.5 million by FINRA back in July 2010 for negligent misrepresentations of mortgage delinquencies related to subprime mortgage backed securities.

A mortgage backed security (MBS) is a debt security whose cash flows come from, and are backed by, the principal and interest payments of borrowers on the mortgage loans. The pooling of mortgages into a debt security is called securitization and is performed by a trust. Mortgages are originated by public and private agencies, they are then securitized into MBS by a trust, and then the MBS is issued to public investors by the trust. MBS carry a variety of risks for investors, such as interest rate and prepayment risk (when the borrowers refinance to a new mortgage) and credit risk (of the borrower). When mortgage delinquencies increase the credit risk of the MBS obviously increases, this explains why brokerages that sell MBS have an incentive to cover up delinquencies.

SLCG has written a paper describing the market and history of CMOs (a type of MBS) in the wake of the collapse of Brookstreet Securities and two Bear Stearns hedge funds which held CMOs and suffered huge losses. Investors can use our dedicated website for other papers and notes.