The Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac, on Friday sued 17 major domestic and foreign banks, alleging they sold at least $189 billion worth of toxic mortgage securities to taxpayer-backed Fannie and Freddie in the years leading up to the financial crisis.
The suits target Bank of America, Citigroup, J.P. Morgan Chase, Goldman Sachs and General Electric, among others.
Fannie and Freddie executives knew these securities — subprime loans and other riskier products — could lead to losses. But FHFA argues in its complaint that the securities were even shakier than Fannie and Freddie executive realized, because mortgage lenders had lied about the ability of borrowers to repay the loan or engaged in other fabrications.
Fannie and Freddie have lost nearly $200 billion as a result of the housing crash and the recession. Those losses largely have been plugged by taxpayers under a deal arranged in September 2008, when the government seized the two firms to keep them from failing.
The suits target the banking industry nearly three years after the housing market collapsed and credit markets froze up, forcing the government to commit hundreds of billions of dollars to stabilizing the financial sector. The abundance of mortgage-backed securities that banks created in the lead-up to the crisis has cost them dearly in recent years.
Bank of America, for instance, already has agreed to pay billions to settle some claims related to securities that went bad. The firm, whose stock has been battered this year, recently announced that it has set aside about $18 billion for additional litigation related to its mortgage portfolio. Last month, insurance giant American International Group sued Bank of America and its affiliates, seeking to recover more than $10 billion in losses on securities it said has been misrepresented.
In addition, a handful of the nation’s largest banks currently are embroiled in settlement negotiations with federal officials and state attorneys general over shoddy foreclosure practices that sparked a national uproar last fall. That settlement could cost the banks somewhere in the neighborhood of $20 billion in penalties and force them to revamp the way they service loans and deal with troubled borrowers seeking to stay in their homes.
Separately, New York attorney general Eric Schneiderman has undertaken an investigation into the way banks packaged and sold their mortgage-backed securities in an effort to determine the extent of any wrongdoing.
The FHFA’s actions against the banks are not be unprecedented.
In July, the agency filed a similar suit against UBS Americas Inc. in a federal court in New York, alleging federal securities law violations. The case accuses UBS of misleading investors who bought into pools of loans that had been packed together into mortgage-backed securities. The suit alleges that the company misstated certain facts and omitted others, including information about the creditworthiness of the borrowers and the underwriting practices used in making the loans.
The agency said this suit was intended to recoup losses suffered by Fannie and Freddie related to their $4.5 billion investment in securities sold by UBS.
Banking industry representatives, who spoke on condition of anonymity, said any fraud charge would be difficult to prove. They said the losses resulted from the surprising severity of the economic downturn. Moreover, they that Fannie and Freddie officials were major participants in the mortgage markets, not innocent bystanders.
“These are folks that were involved in creating these securities,” said one industry official. “The idea that Fannie and Freddie were victims in this, it defies credibility.”