From the October 01, 2011 issue of Futures Magazine • Subscribe!

FHFA takes on banks

Victim or villain?

As the three-year anniversary of the Lehman Brothers bankruptcy filing passed, the flashpoint for the credit crisis, the Federal Housing Finance Agency (FHFA) has filed lawsuits against 17 major banks for allegedly misrepresenting securities they sold to Fannie Mae and Freddie Mac before they were placed under the conservatorship of the FHFA. In addition to the banks, FHFA also listed 131 individuals in the suits.

The lawsuits are an attempt to recoup some of the $200 billion losses Fannie and Freddie experienced during the housing crisis as mortgage-backed securities plummeted. Banks named in the lawsuits include Bank of America, JP Morgan Chase and Goldman Sachs.

FHFA alleges in the filings that the securities Fannie and Freddie purchased were misrepresented to them by the banks. "At the heart of the suits is FHFA’s conclusion that the actual mortgages backing many of the securities had characteristics that differed in a material way from what had been represented in securities filings," FHFA said in a release.

John Jay, senior analyst at Aite Group, says proving exactly what the product was represented as being will be the deciding factor. "In a lot of these cases in which there are enormous losses, lawsuits are going to be inevitable. The issue is going to be whether there was any misrepresentation. FHFA is saying, ‘You sold us XYZ and it turned out to be ABC,’" he says.

In the filings, FHFA claims the securities were sold based on material containing false or misleading statements and omissions. Further, it claims, "Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans."

FHFA did not say what damages it is seeking.

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