Tuesday, September 06, 2011 11:20:00 AM
On Friday, the Federal Housing Finance Agency (FHFA), the federal agency that oversees Fannie Mae and Freddie Mac filed lawsuits against numerous big banks, claiming they sold nearly $200 billion in fraudulent mortgage investments to the mortgage giants that led to massive losses during the financial crisis.
The suits, filed Friday in New York and Connecticut, name 17 domestic and foreign banks as defendants. Among them are Bank of America, J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, and Deutsche Bank.
According to the court filings, those firms and others "falsely represented" the quality of the loans that were bundled into securities and sold to investors and "significantly overstated the ability of the borrower to repay their mortgage loans." The result, the suits claim, were investments that were far riskier than the banks led taxypayer-backed Fannie and Freddie to believe, and the securities ultimately were worth a fraction of their original value.
The suits also 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.
The filings represent an escalation in the government's effort to recoup taxpayer losses incurred during the financial crisis, however the actions also raises questions about the toll the suits might have on the health of the already struggling banking sector and the prospects for a housing market recovery.