Dynex Accused of Hiding Repos

Lawsuit claims meaningful underwriting standards abandoned

February 22, 2005

By PATRICK CROWLEY

A Teamsters Union that purchased the Merit Series 13 securitization financing bonds is the lead plaintiff, though the law firm of Schoengold & Sporn are seeking others to join the class action.

“The complaint alleges that…the prospectus disseminated by Merit in connection with the offering of the bond contained materially false and misleading information concerning the manufactured housing loans,” the plaintiffs lawyers said in a written statement.

“These misstatements included that the bonds were originated in compliance with underwriting standards, when in fact, those procedures were largely disregarded,” the lawyers said. “These misstatements resulted in an artificially high credit ratings and pricing.”

Dynex issued a press release acknowledging the allegations but promising a fight.

“The company is currently evaluating the allegations made in the lawsuit and intends to vigorously defend itself against them,” Dynex said in a written response to the lawsuit.

According to a copy of the complaint, Merit issued the bonds and then made approximately $325 million after selling them to underwriters.

Lawyers for the plaintiffs allege “that the bonds prices were inflated due to misrepresentations of the true repossession rates.”

“The truth only began to emerge following the disclosure of corrected repossession and foreclosure rates on Feb. 24, 2004, as the bonds were dramatically downgraded,” the lawyers said.

“Moreover, ensuing disclosures in April of 2004 revealed that even Merit’s current manufactured housing collateral may be deemed impaired,” lawyers said.

Dynex Capital is traded on the New York Stock Exchange. In the late 1990s the company was facing heavy competition, particularly in the South, from major players in the manufactured housing lending industry.

Because of the fierce competition Dynex abandoned “any meaningful underwriting standards,” according to the lawsuit.

In financial reports, Dynex was understating cumulative foreclosures and repossessions by approximately 30 percent, it is alleged in the lawsuit.

In the fall of 2003, the cumulative repo figure was $47 million, according to the suit.

“Had plaintiffs and other members of the class (action) known the truth, they would not have purchased” any of the securities, the suit claims.

The plaintiffs have suffered “substantial damages as a result of the wrongs” by Dynex, the lawyers say in the suit.

Bombardier Capital, the financial arm of the Canadian manufacturing giant Bombardier Inc., is facing a similar class action federal lawsuit filed in early February.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]