The Real Deal Miami

Federal suits planned against banks over mortgage securities

September 02, 2011 12:33PM

The Federal Housing Finance Agency plans to sue Bank of America,
JPMorgan Chase, Goldman Sachs and Deutsche Bank, accusing them of
misrepresenting the quality of mortgage securities they assembled and
sold at the height of the housing bubble, and seeking billions of
dollars in compensation, the New York Times reported. The lawsuits
follow subpoenas the FHFA issued a year ago. The timing of the suits
is related to a statute of limitations that expires next Wednesday.

The
lawsuits will allege that the banks did not fulfill their duties under
securities law and didn’t pay attention to the fact that borrowers’
incomes were infalted or falsified. The FHFA is the federal agency
formed in 2008 to oversee Fannie Mae and Freddie Mac, which lost more
than $30 billion, in part as a result of deals with the banks, amounting to losses that have
been paid by taxpayer money.

The financial services industry executives argue that the losses on the
mortgage-backed securities were caused by a broader downturn in the
economy and the housing market, and not by how the mortgages were
originated or packaged into securities. They also contend that
investors like Fannie and Freddie knew the securities were not without
risk. In addition, Bank officials argue that further legal attacks on them
will only delay the recovery in the housing market, hurting the
broader economy.

Freddie was warned by regulators in 2006 that its
purchases of subprime securities that were greater than its risk
management abilities, but the company continued to load up on debt
that ultimately soured. As of June 30, Freddie held more than $80
billion in mortgage securities backed by more shaky home loans like
subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its
total gross losses stand at roughly $19 billion. Fannie holds $38
billion of securities backed by Alt-A and subprime loans, with losses
standing at nearly $14 billion.

At the same time 50 state attorneys
general are in the process of negotiating a settlement to address abuses
by the largest mortgage servicers, including BofA, JPMorgan
and Citigroup. [NYT]