In a move that some analysts fear could lead to further tightening in residential mortgage lending, Fannie Mae and Freddie Mac’s regulator has sued 17 banks to recover billions in losses on "private label" mortgage-backed securities the mortgage giant purchased during the housing boom.
Fannie and Freddie bought the securities — pools of subprime and "alt-A" loans considered too risky or large to qualify for their own guarantee programs — as investments before the companies were placed under government conservatorship in 2008.
The Federal Housing Finance Agency, which as conservator of Fannie and Freddie is charged with minimizing their losses, announced Friday it was suing 17 financial institutions, claiming some of the losses the mortgage giants have racked up on private-label MBS were due to "misrepresentations and other improper actions."
FHFA alleges that some of the loans backing the securities "had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the (Fannie and Freddie) for those securities."
Some of the biggest names in the business are named in the lawsuits, including Ally Financial, Bank of America Corp., Barclays Bank PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs & Co., and JPMorgan Chase & Co.
Several banks named as defendants in the lawsuits have denied the allegations, and financial analysts are warning that they could further stifle mortgage lending.
A spokesman for Deutsche Bank characterized Fannie and Freddie as "the epitome of a sophisticated investor," having issued trillions of dollars in MBS themselves and purchased hundreds of billions of dollars more as investments.
In a statement issued today, FHFA said the actual mortgages backing many of the securities "had characteristics that differed in a material way from what had been represented in securities filings. Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold."
Former federal bank examiner Paul Miller of FBR Capital Markets & Co. estimates banks may be facing $121 billion in losses if they are forced to repurchase contested loans, which Miller said could drain capital and lead banks to overtighten underwriting standards.
FHFA and the government-sponsored enterprises "need to stop punishing banks for their lending practices from several years ago, even though they may have a legal right to do so," Miller wrote in a note to clients, Bloomberg reported.
Analyst Richard Bove of Rochdale Securities LLC said in a note to clients that the lawsuits demonstrate that the government "is committed to breaking up the banking industry," Bloomberg reported (FHFA is an independent regulatory agency).
But former Troubled Asset Relief Program (TARP) special inspector general Neil Barofsky recently said that if the government does not pursue valid claims against banks "that’s nothing more than a transfer of money" or bailouts from taxpayers to bank shareholders.
In July 2010, FHFA announced it had issued 64 subpoenas from unnamed companies to obtain loan documents as part of a plan to recoup losses in cases where misrepresentations and breaches of warranty were made.
In January, FHFA said it had reached three separate agreements with Ally Financial and Bank of America resolving some claims for $3.3 billion.
Fannie and Freddie bought private-label securities as a sideline to their main business — guaranteeing payments on less risky mortgages packaged for sale to investors as "agency MBS."
Although private-label MBS has never constituted more than a fraction of Fannie and Freddie’s overall portfolio, the securities have accounted for a disproportionate share of the company’s losses.
According to FHFA’s annual report to Congress in June, Fannie Mae recorded $722 million in "other than temporary" net losses during 2010 on its $82.5 billion private-label MBS portfolio, which includes commercial MBS and mortgage revenue bonds, while Freddie Mac recorded $4.3 billion in losses on its $158 billion private-label MBS portfolio.