In what I believe is a step in the right direction, the U.S. government has filed suit against 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed. Among the Defendants in the lawsuits are Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse, were also sued by the government.
The lawsuits were filed by the U.S. Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, the two agencies that bought mortgage loans and mortgage securities issued by the lenders. The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits is $196 billion. The government says it wants the securities sales canceled and wants to be compensated for lost principal and interest payments, as well as for FHFA’s attorneys’ fees.
Bank of America bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion. After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.
Bank of America has already paid $12.7 billion this year to settle similar claims. Last month, insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments. In a statement, Bank of America has rejected the claims in the government’s lawsuits, saying Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn’t have the needed risk-management capabilities. The bank said Fannie and Freddie are now seeking to hold other market participants responsible for their losses.
Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the U.S. real estate bust and helped fuel the global financial crisis beginning in late 2008. According to FHFA, the mortgage-backed securities were sold to Fannie and Freddie based on documents that “contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans.” Also sued by the government were Ally Financial Inc. (formerly known GMAC LLC), Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Morgan Stanley, Nomura Holding America Inc., and Societe Generale.
There has been some criticism over the filing of these lawsuits. According to FHFA, it decided to file the lawsuits because the firms misrepresented the mortgages in securities filings. The agency said in a statement:
At the heart of the suits is FHFA’s conclusion that the actual mortgages backing many of the securities had characteristics that differed in a material way from what had been represented in securities filings.
FHFA said in its statement that the amount that might be recovered would be determined by the courts, and that it was “premature” to estimate recoverable damages. But, it did say that the amount would be below $200 billion, since that figure represents the original amount of securities purchased, not the actual losses incurred. The agency takes the position that under the securities laws at issue in the case, it does not matter how “big” or “sophisticated” a security purchaser is, “the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold.” According to the lawsuits, the securities should have never been sold because the underlying mortgages did not meet investors’ criteria.
Source: Claims Journal
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