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FHFA Sues 17 Companies Over MBS Losses

Acting on behalf of ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and ""Freddie Mac"":http://www.freddiemac.com/, the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) filed suits Friday against 17 of the nation's largest banks and firms to recover losses stemming from bad mortgage-backed securities sold in some instances under acquired companies, according to multiple news outlets. The defendants under fire: ""Bank of America"":https://www.bankofamerica.com/, ""Deutsche Bank"":http://www.db.com/index_e.htm, ""Goldman Sachs"":http://www2.goldmansachs.com/, and ""JPMorgan Chase"":http://www.jpmorganchase.com/corporate/Home/home.htm, among others.


According to a story in the ""_New York Times_"":http://www.nytimes.com/2011/09/02/business/us-is-set-to-sue-dozen-big-banks-over-mortgages.html?_r=1&hp, which broke the news earlier, the FHFA launched the suits with allegations that the mortgage giants systemically falsified borrower information related to the securities packaged and sold to the market during the financial crisis.

At stake: tens of billions of dollars in assets, according to market watchers. The ""_Los Angeles Times_"":http://www.latimes.com/business/la-fiw-bank-lawsuit-20110902,0,3983883.story fixed losses in mortgage-backed securities for the GSEs at $41 billion.

The federal agency announced that it filed the suits in a New York federal court, citing the role it plays as conservator of the GSEs.

""The complaints filed today reflect FHFA├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings,"" the agency said.

The FHFA claimed ""the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities.""

Stefanie Johnson, a spokesperson with the agency, could not be immediately reached for comment.

Reacting to the suits, Rick Simon, a spokesperson with Bank of America, rebuffed action against the company.

├â┬ó├óÔÇÜ┬¼├àÔÇ£The GSEs have acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment,├â┬ó├óÔÇÜ┬¼├é┬Ø he tells _MReport_.


He says that Fannie and Freddie ├â┬ó├óÔÇÜ┬¼├àÔÇ£claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so.

├â┬ó├óÔÇÜ┬¼├àÔÇ£Despite this,├â┬ó├óÔÇÜ┬¼├é┬Ø Simon says, ├â┬ó├óÔÇÜ┬¼├àÔÇ£the GSEs are now seeking to hold other market participants responsible for their losses.├â┬ó├óÔÇÜ┬¼├é┬Ø

The suits pile new litigation atop more recent action taken against the likes of ""Citigroup"":http://www.citigroup.com/citi/homepage/ and JPMorgan by attorneys general from 50 states.

The assets at stake in those suits amount to some $20 billion, with much of it intended to help homeowners in distress with their mortgages, according to the _New York Times_.

The newspaper also cited a $10-billion suit underway with ""American International Group"":http://www.aigcorporate.com/index.html, which filed it to recover losses in similarly misrepresented mortgage-backed securities by Countrywide Financial Corp. and Merrill Lynch.

Speaking with _MReport_, Tim Rood, managing partner with ""Collingwood Group"":http://www.collingwoodllc.com/ and a former principal with Fannie, acknowledges that the ""FHFA acted in accordance with their charter.""

He also says that the move by one agency signals ""evidence of a lack of coordination among these regulating agencies, because I'm sure the FDIC wouldn't think this is the smartest thing in the world to do.

""You have a lot of unintended consequences from these moves,"" he says, explaining that more mortgage banks could tilt toward insolvency as a result of tens of billions of dollars in potential litigation expenses.

""If we go after these guys, we should be a bit more thoughtful about how this will help the economy,"" Rood says, referencing the financial institutions.

Alex Pollock, a resident fellow with the ""American Enterprise Institute"":http://www.aei.org/ and former head of the Federal Home Loan Bank of Chicago, says that litigation will ""certainly be very costly to banks in terms of their earnings and capital.""

He describes the current climate for litigation and loss recovery as ""a nationwide strategy, game, and debate about who we can pass the buck to"" for the financial crisis.

""These very large losses, which are unavoidable and inevitable, raise the question about who gets to take the loss,"" he says.

Asked whether the GSEs will retake their recovered capital or hand it off to their federal conservators, Rood says he suspects ""it would end up on the balance sheets of the GSEs,"" although he speculates that it could also ""potentially reduce the exposure of the government"" to instability in the mortgage markets.