- Two real estate investment funds have sued the Royal Bank of Canada, alleging that it "illegally confiscated" securities that the funds had pledged as security for short-term loans, known as repurchase agreements.
- The funds applied for an injunction to prevent RBC from selling some of the collateral at auction today, although a judge approved the sale because the filing was not submitted in a timely manner, a person informed about the case.
- RBC "presses the accelerator to illegally confiscate and unload a large portfolio of plaintiffs' assets at fire selling prices," the lawsuit said.
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Two real estate investment funds have sued the Royal Bank of Canada, stating that it had illegally seized its assets during a downturn that has frozen the commercial mortgage-backed securities market.
The lawsuit shows how much a separation is emerging between investment firms and lenders if the corona virus turns the massive US mortgage market upside down. With the collapse of the financial markets, security values become increasingly difficult to determine and lead to disputes between counterparties.
Funds affiliated with investment firm Angelo Gordon & Co say RBC has moved too quickly to reduce the value of its securities during a market downturn where the coronavirus pandemic has essentially frozen the securitized products market. RBC made margin calls to the funds and confiscated their collateral.
An RBC spokesman declined to comment.
According to the mutual funds, the problem is that the market is so frozen that it is impossible to determine the value of their securities. According to the lawsuit, "there is currently no objective means of calculating & # 39; market value & # 39; because the & # 39; market & # 39; is temporarily frozen."
Mutual funds such as these, known as mortgage real estate investment trusts, borrow money from banks such as RBC and in turn pledge collateral. When the value of the collateral goes down, lenders typically ask customers to deposit more cash or collateral in the form of a margin call. If customers cannot meet these new requirements, lenders usually have the right to seize the collateral.
The funds said in the lawsuit that RBC's actions violated the documents governing its funding relationship. The funds reported receiving margin calls from RBC on March 23.
The turmoil in the markets where US stocks fell 30% from their highs has passed to the US mortgage industry, forcing valuations of mortgage-backed residential and commercial real estate securities to decline. Mutual funds have been reported to flood the market with billions of dollars of securities in recent days to raise cash.
With such losses in value, the funds said "virtually every major money center bank" had agreed to initiate talks to delay margin calls or draw up compensation agreements. RBC has so far refused, according to the lawsuit.
RBC "presses the accelerator to illegally confiscate and unload a large portfolio of plaintiffs' assets at retail prices, which will have a cascading effect on the mortgage-based asset market," the lawsuit said.
RBC sold CMBS worth $ 600 million in an auction today after being seized by customers in the past few days. according to to the Wall Street Journal. At least $ 11 million of it was seized from Angelo Gordon's funds, according to the lawsuit.
The funds applied for an injunction to prevent the further auction. A judge allowed the sale because the filing was late, a person informed about the trial.
The funds are not the only RBC clients who have had problems with the bank's actions in the past few days.
On Wednesday, Exantas Capital Corp, another mortgage investment company, said RBC had sent omissions that it denied and intended to defend itself against. Exantas said on March 23 that it had failed to meet some margin calls.
The company "intends to vigorously enforce its rights and defenses against any counterparty misconduct for CMBS repo financing," the press release said.
The turmoil on the mortgage market is reminiscent of the 2008 financial crisis, when credit markets froze in the face of falling mortgage securities. To support the market, the Federal Reserve launched an emergency loan program on Monday that allows it to buy some types of mortgage-backed securities.