Friday, September 2, 2011

Feds sue banks to recoup money lost on mortgages

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Washington - A federal agency sued more than a dozen leading banks to recover losses on mortgage-backed securities sold to Fannie Mae and Freddie Mac today, Friday September 2.

The lawsuits allege that banking officials lied about both the worth of the securities and the ability of the borrowers with whom the firms had executed mortgage contracts to repay their obligations.

The Federal Housing Finance Agency targeted Bank of America, JPMorgan Chase, Deutsche Bank, Citigroup, Barclays and Morgan Stanley, among others, in an attempt to recover an additional $363 billion in addition to $153 billion paid out by taxpayers in a $700 billion 2008 bailout of the banks considered “too big to fail.”

Following the debacle, the government wound up owning the two once semi-private mortgage security outfits, Fannie and Freddie.

Though much of the money has been repaid, the Obama Administration and the Federal Reserve have come under intense criticism for going too easy on the banks in efforts to recover taxpayer funds.

The suit alleges that Fannie and Freddie bought more than $50 billion in securities from Bank of America and two companies it acquired shortly later, Countrywide and Merrill Lynch. The suit identifies 23 securities sold by Bank of America for $6 billion which “caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.”

The costs of such a suit may be seen in a similar federal suit filed against UBS, which alleged that $900 million in losses could be traced to $4.5 billion in securities sold to Fannie and Freddie. A similar 20% settlement could cost Bank of America $10 billion.

When the housing bubble burst in 2007, $33 billion sold by JPMorgan Chase, $20 billion sold by Morgan Stanley and $11 million sold by Goldman Sachs declined sharply in value. Foreign banks which acquired securities and bundled them for sale include $14.2 billion sold by Deutsche Bank, $30.4 billion by Royal Bank of Scotland and $14.1 billion bundled by Credit Suisse.

In the suit brought against the Bank of America, the government alleges that securities “contained materially false or misleading statements and omissions.” Several individual 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.”

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