FHFA Files Massive Civil Claims Against 17 MBS Issuers


The Federal Housing Finance Agency late Friday filed a massive multi-billion civil suit against 17 firms that played a role in selling faulty subprime MBS to Fannie Mae and Freddie Mac – including the government owned Ally Financial and Fannie’s biggest customer at one time, Countrywide Financial Corp.

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FHFA alleges that loans in the $200 billion of private-label securities that the 17 financial institutions sold to Fannie and Freddie had riskier characteristics than the descriptions in the marketing materials disclosed. The sales generally occurred between 2005 and early 2008.

By purchasing these bonds the GSEs supplied massive liquidity to the subprime business, allowing consumers with bad credit to either buy a house or trade up. 

“Actual recoveries would be determined on filings by the parties, evidence and judicial findings,” an FHFA spokesperson said. “At this time it would be premature and potentially misleading to estimate what recoveries would be.”

The federal agency filed its lawsuits nearly three years after it took Fannie and Freddie into government conservatorship. It decided to sue the banks now because a three-year statute of limitations is about to expire.

Merrill Lynch – one of the largest issuers of subprime MBS during the housing boom – is on the hook for almost $25 billion in claims. But the largest single claim is against Countrywide: $26.6 billion. Both these defendants are now the property of Bank of America, the troubled banking giant which has been publicly dismantling its mortgage business over the past year.

The officials list of defendants includes: Ally Financial, Bank of America, Barclays Bank PLC, Citigroup, Countrywide Financial, Credit Suisse, Deutsche Bank, First Horizon National Corp., General Electric, Goldman Sachs, HSBC North America Holdings, JPMorgan Chase, Merrill Lynch, First Franklin Financial, Morgan Stanley, Nomura, Royal Bank of Scotland Group PLC, and Société Générale. 

Wells Fargo Co., a major player in subprime, is notably absent from the suit.

In short, the defendant list reads like a who’s who of subprime issuance from 2005 to 2008. (None of the owners of these firms are listed as defendants.)

In the case of Ally, the government is suing a company that it actually owns. Another key defendant is Royal Bank of Scotland, which at one time owned Greenwich Capital, a Wall Street firm that securitized almost every loan originated by now defunct subprime giant Ameriquest Mortgage.

In suing the firms FHFA said, “The false statements of material facts and omissions of material facts in the Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including without limitation depreciation in the value of the securities.”

JPMorgan Chase is on the hook for $33 billion in total claims stemming from its ownership of Washington Mutual and Bear Stearns.

In its claims against Goldman, FHFA alleges that Fannie and Freddie bought $11.1 billion in securitizations, and that the damages are in the hundreds of millions of dollars. In the case against Citigroup, the agency alleges that in connection with $3.5 billion in securitizations, damages are in the hundreds of millions of dollars.

The lawsuits are seeking damages and civil penalties under the Securities Act of 1933, in addition to compensatory damages for negligent misrepresentation, according an FHFA press release.

The agency also stated that it has had discussions regarding the allegations with several of the firms it is suing.

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