UBS: It Just Doesn't Get It
After losing billions of dollars in subprime securities itself and selling subprime securities to investors that resulted in additional billions of dollars in losses, UBS is once again urging investors to buy subprime securities backed by an exotic type of mortgage. According to UBS, subprime securities backed by option adjustable-rate mortgages represent a “great value.”
Option adjustable rate mortgages (“option ARMs”) are exotic mortgages that let the borrowers decide how much they will pay on a mortgage each month. If the borrower decides to pay less than the monthly interest charges, the mortgage balance increases. Generally, if the borrower defers paying interest charges which equal 10 to 15% of the original loan amount, payments become mandatory.
Option ARMs are a great leverage tool but, as with all leverage tools, involve increased risks. Such mortgages can easily become “upside down” (the mortgage balance is greater than the value of the house). Such mortgages can be particularly dangerous in environments where housing prices are flat or declining. Furthermore, such mortgages offer high default potential when interest rates increase.
UBS's opinions regarding the “great value” offered by certain securities backed by option ARMs is particularly surprising in light of related events. Peloton Partners ABS Fund, a hedge fund heavily invested in subprime indexes, AAA rated subprime securities and high quality Alt-A securities, just announced that the $1.8 billion fund was being liquidated and that investors were unlikely to get any money back. UBS was a major lender to the ABS Fund and was reportedly seeking more collateral to secure its indebtedness.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing individual and institutional investors regarding their subprime investment problems with UBS and other firms. For further information, please contact us.
