FHFA To Sue Big Banks for Investment Putbacks

The New York Times is reporting that the FHFA, the agency which oversees Fannie Mae and Freddie Mac, is planning on suing twelve major banks today or Tuesday, accusing the banks of “misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble.”

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

Until the suit is filed, we won’t know exactly how much money FHFA is seeking to get from the banks. This move is in a similar mold to other efforts to putback loses onto the banks, thereby reducing the liabilities  incurred by Fannie and Freddie. FHFA administrator Ed DeMarco, a holdover from the Bush administration, has pursued this strategy for a while now. The statute of limitations on filing this sort of securitization lawsuit expires this coming Wednesday, so there’s some sense that this is happening now to get any action in under the wire.

The banks and their surrogates are trotting out the idea that Fannie and Freddie are sophisticated investors, who should have been able to tell that things Standard & Poors rated as AAA were not in fact anywhere near AAA quality investments.  I’m not clear how well the, “They should have known we were peddling junk and were just paying ratings agencies to say it wasn’t” defense will play out in court. The problems with securitization go far beyond what the Times describes, with many of these securities put together while the underlying loans were already delinquent, in foreclosure, in bankruptcy or already owned by the banks. Hopefully FHFA comes out with big numbers in their lawsuit that adequately reflect the scale of the securities fraud committed by these banks and seek restoration, as well as punishment, for this fraud.

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