FHFA Sues 17 Banks Over Massive Mortgage Losses At Fannie and Freddie

The ripple effects of the financial crisis continue to take their toll on banks, as reckless lending during the bonanza years catches up to them.  Friday after the closing bell, and ahead of a Labor Day weekend, the Federal Housing Finance Agency confirmed it was suing 17 different financial institutions for misrepresenting the quality of mortgage backed securities sold to Fannie Mae and Freddie Mac.
Affecting major banks like Bank of America, JPMorgan Chase, Goldman Sachs and Citigroup, the suit alleges negligent misrepresentation, securities laws violations, and common fraud as they issued, bundled, and sold MBS to government sponsored enterprises. (See list of institutions, amounts, and the suit against BoA below).
The FHFA is not looking for repurchases, but rather is looking to retrieve losses on Fannie and Freddie’s loan portfolios.  JPMorgan is being sued over $33 billion in securities, while Bank of America-Merrill Lynch is on the hook for almost $25 billion, and the Vampire Squid, Goldman Sachs, is in for $11.1 billion.
According to the suit, “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.”
As mentioned above, the FHFA, suing on behalf of Fannie and Freddie, is looking to retrieve losses, rather than for buybacks.  UBS suffered the FHFA’s lawyers back in July when it was sued for the violations, with the FHFA looking for $900 million on a $4.5 billion portfolio.  According to CNBC, the total amount involved in the current suit tops $120 billion.  According to the NY Times, Fannie and Freddie lost over $30 billion as a result of the financial crisis, most of which was borne by taxpayers.
The so-called MBS machine helped banks make big bucks during the bonanza years ahead of the crash.  Fueled by easy money, complacent regulators, and compliant credit-rating agencies, banks and mortgage originators pushed to bundle an ever-increasing number of loans and mortgages, despite their credit quality, in order to keep the MBS machine going.  Risk management was forgotten as profits took primacy; banking sector earnings hit record highs in 2007, as the whole thing began to crumble.
As subprime borrowers began to default on their loans at a national level, banks begun to see their scheme unravel, with AAA-rated securities, backed by such borrowers, tumbling in value.  Wall Street greed put the global financial system on its knees and sent the economy into its deepest contraction since the Great Depression.
Unemployment remains above 9% and GDP is growing at less than snail’s speed, as the number of economists and analysts predicting a recession increases daily.  To a pretty substantial point, this is a consequence of the MBS-machine and of banks’ relentless need for higher and higher profits. The ends, for them, justified the means. (Read Ghastly Jobs Report As Economy Stares Recession In The Face).
Banks have already been sued by the attorneys general of all 50 states over robo-signing, or mass foreclosures carried on without abiding by the legal process.  The NY Times reports they are looking for about $20 billion in damages.
Bank of America, one of the most targeted entities for litigation after its acquisition of Countrywide, was also sued last month by AIG which sought $10 billion in damages for misrepresenting the quality of securities it was selling.  Countrywide, headed by convicted fraudster Angelo Mozilo, was one of the biggest mortgage originators in the country. (Read Bank of America’s Latest Peril: Losing Merrill Lynch?).
Bank of America was the first of the defendants to give a public response to the suit, claiming Fannie and Freddie are trying to hold other market participants responsible for their losses.  The argument, repeated over the last couple of days by finance insiders, is that both Fannie and Freddie were sophisticated investors and understood securities are inherently risky.
The reality, of course, is a little more complicated.  The financial crisis is an example of an organizational failure across a web of actors that involved primarily banks, credit rating agencies, and regulators, as well as mortgage buyers that possibly underestimated or didn’t understand the risks of buying a home.  More than just a failure, there was complicity, to a certain extent, between many of the major actors, as banks looking for higher profits lobbied regulators, while credit-rating agencies took hefty commissions from rating as many securities as possible.  Their house of cards, though, fell with destructive force.
Below is a list of major institutions along with the value over which they are being sued for.

1. Ally Financial Inc. f/k/a GMAC, LLC ($6 billion)
2. Bank of America Corporation ($5 billion)
3. Barclays Bank PLC ($4.9 billion)
4. Citigroup, Inc ($3.5 billion)
5. Countrywide Financial Corporation ($26.6 billion, Countrywide was bought by Bank of America)
6. Credit Suisse Holdings (USA), Inc
7. Deutsche Bank AG ($14.2 billion)
8. First Horizon National Corporation ($883 million)
9. General Electric Company ($549 million)
10. Goldman Sachs & Co. ($11.1 billion)
11. HSBC North America Holdings, Inc. ($6.2 billion)
12. JPMorgan Chase & Co. ($33 billion)
13. Merrill Lynch & Co. / First Franklin Financial Corp. ($24.8 billion)
14. Morgan Stanley
15. Nomura Holding America Inc. ($2 billion)
16. The Royal Bank of Scotland Group PLC ($30.4 billion)
17. Société Générale ($1.3 billion)

Read Document http://www.forbes.com/sites/afontevecchia/2011/09/02/fhfa-sues-17-banks-over-massive-mortgage-losses-at-fannie-and-freddie/