Obama admin. to sue big banks for mortgage securities fraud

The New York Times is reporting that the Federal Housing Finance Agency (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 similar to other efforts to put losses back 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 junk” defense will play out in court. The problems with securitization go far beyond what the Times describes — many of these securities were 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.

Update:

More from David Dayen:

this is the nightmare scenario for the banks. FHFA is joining a slew of other private investors seeking to force repurchases on these mortgage backed securities which they clearly screwed up during the bubble years. Bank of America tried to settle a bunch of these cases, but thanks to Eric Schneiderman, some investors not in on the settlement and even a group of homeowners, that MBS settlement looks in tatters. A federal judge yesterday questioned the rush to settlement. Bank of America, by the way, would face the biggest dollar value in an FHFA suit because they sold the most MBS to Fannie and Freddie. The Fed has been asking BofA for contingency plans; that doesn’t happen with healthy firms.

Years after the financial crisis crested, the banks are suffering with the exact same liabilities that threaten their very existence. So the next time someone talks your ear off about how TARP worked and we had to make the banks healthy for the good of the economy, tell them this story and ask them if you think banks with enormous mortgage liabilities and vulnerabilities on fraud are healthy. A major problem with the economy is that we have these zombie banks which, despite extraordinary government support, cannot escape the tremendous losses from their housing bubble schemes.


Matt Browner-Hamlin is a blogger & political strategist based in Washington, DC. He has written about US politics since 2004. He's worked on presidential and Senate campaigns, in the labor movement and the Tibetan independence movement. He is the founder of OccupyOurHomes.org and currently spends much of his time fighting Wall Street banks. Matt on Google+, and his .

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