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  • FHFA Sues Banks to Recover Housing Bond Losses: Less Than Meets the Eye?

    News reports say that the Federal Housing Finance Agency (FHFA) will sue about 12 major banks in order to recover some of the losses that Fannie Mae and Freddie Mac sustained on mortgage-backed securities the banks issued.

    The suits will seek to make the banks repay a share of about $30 billion in losses from securities that Fannie Mae and Freddie Mac bought before they essentially failed and the FHFA took them into conservatorship in September 2008.

    Since any recovered money would reduce the over $150 billion the taxpayers have already spent on bailing out the two housing giants, this should be good news. However, the FHFA should not start counting the money it plans to recover quite yet. The suits are being filed now because the statute of limitations expires next week, and the burden of proof that the FHFA will have to meet will be high.

    The FHFA is expected to charge that the 12 or so banks should have known that the mortgages that had been packaged into the securities that Fannie Mae and Freddie Mac bought were riskier than advertised. It claims that the banks failed to adequately check the quality of the mortgages before either selling them to packagers who combined mortgages into mortgage-backed securities or packaging them into securities themselves.

    It is true that this happened far too often, and especially so in the year or two just before the housing bubble burst in 2008. There was a huge demand for high quality mortgage-backed securities across the world and not nearly enough quality home buyers. Some issuers took any step possible to create securities that appeared to be higher quality than they actually were. In doing so, some mortgage bankers clearly lent money to people who did not have anywhere close to the income necessary to repay the mortgages, and in some cases, borrowers were tricked into mortgages they could not understand.

    However, most of the worst mortgages were made by other types of mortgage lenders, and not by the banks being sued. And government involvement in the mortgage market also bears a significant amount of blame for the 2008 crisis. The FHFA lawsuit is following an old legal practice of suing the deep pockets who might be able to either pay significant damages or settle out of court to avoid costly litigation.

    In late 2008, the entire mortgage-backed securities market collapsed in part because buyers and sellers could not tell which bonds were backed by good quality mortgages and which were backed by poor quality ones. It will be very difficult for the courts to tell how much of the losses Fannie Mae and Freddie Mac suffered were caused by careless banks and how much were caused by the general market collapse.

    Further, it will be hard to say whether the banks being sued issued securities or made mortgages that were worse than those made by other lenders. This is especially true since the securities were rated by one or more of the credit ratings agencies, which might have been expected to catch some or all of the errors when they examined the bonds.

    In short, this is not a black-and-white question of going after “bad” banks, and we should not assume that those being sued are actually guilty until after a court rules. It would also be a mistake to assume that those 12 were any worse than dozens of other lenders who are not being sued because they have since gone out of business. Regulators have a history of going after deep pockets, and the burden will be on them to prove that they have a case.


    Posted in Economics [slideshow_deploy]

    11 Responses to FHFA Sues Banks to Recover Housing Bond Losses: Less Than Meets the Eye?

    1. Johnathan says:

      Brokers/investors/speculators/ etc…., all the people who clearly participated in running the real estate market into the ditch are still getting away with stealing and ripping off the tax payers via Obama's bailout. Houses they have rented for years, then took out equity at the high by selling properties to an LLC or whoever, then tying up the property in foreclosure with their attorneys on technicalities even, some since 2008 or more, all while collecting rent, not paying mortgages, not maintaining properties, paying taxes? doubt it, and still in foreclosure. Some are doing this times many, many properties equals thousands of dollars monthly plus the hundreds of thousands in past rent and equity loans……where is the Attorney General? Why isn't the highest court stepping in and stopping this corruption and abuse of the court system?

    2. zff says:

      If I was the banks I'd ask the FHFA, "Okay, if we're to blame for supposedly not checking the quality of our securities well enough, then why are Freddie and Fannie blameless for not doing the same exact thing? Shouldn't those two GSE's have checked out what they were buying?"

      And let's not forget Fannie and Freddie shouldn't have been in the business of buying securities anyway. What a joke. Just another Obama witch hunt.

    3. Morris says:

      This is an insane move which will surely depress the housing market even more. Are we to believe that basically every significant financial institution colluded to defraud the Federal Government? Isn't it much more plausible that the loans in question were all in accordance with accepted practices that had been shaped by the government?

    4. Morris says:

      This seems like an attempt to direct blame away from those who deserve it.

    5. Floyd says:

      The government's lawsuits will have to review a time period that goes back to the Clinton administration and his part in updating the Community Reinvestment Act that forced banks to lend to un-creditworthy applicants as well as Janet Reno's part in forcing banks to set up shop in geographical pockets of poverty to attract new applicants that didn't have the money to make mortgage payments. Then the government would have to produce more documents that could implicate it in this fiasco. Clinton's reputation may become tarnished even more with evidence dug up that he and Carter were the main culprits in setting off the housing crash.

      It will also be up to the government to untangle the CRA web and the laws that led to the securitization of bad mortgages. That's going to be an uphill battle and millions of wasted taxpayer dollars for attempting to recover enough money the government needs to create more social programs. These lawsuits can take years and years to ever be settled. Meanwhile, the government would be causing banks to spend millions on defending themselves, taking away from the capital they need to grow. The current administration is out of its mind in doing this.

    6. James says:

      Say the Feds 'win'…What would this mean to the average homeowner who is severely upside down on their mortgage? What about the average bank customer with savings at these banks?

    7. Ardathnoni says:

      I heard an interview with an employee of a lending institution in the first year or so of the crisis when loans were still being written and the "skinny" that there was no credit available was the conventional wisdom. She stated that her job was to write a $1M in lending agreements per week, and to write them precisely so they could be bought by Fanny and Freddie. She went on to say that her institution generated the loans but did not service them: i.e. they sold them. This column says nothing about the guilt of the sue-ers for creating the sue-ees.

    8. Ken Marx says:

      What goes unstated here is that the banks made loans to people who should not have received them because the government forced them to do so. Prudent bankers who made loans only to qualified borrowers were accused of discrimination against minorities. In this PC world, we are afraid to offend anyone, but especially those politicians that can make life more difficult. I fail to understand why the banks haven't been more articulate about this. Why are they afraid to call it like it is?

    9. Wayne Hatch says:

      This suit is troubling. To say that the banks sold risky mortgage securities to Fannie and Freddie can't be disputed, but to lay the blame solely on the banks lacks credibility. Here we have two dominant agencies
      formed to support and expand home-ownership; repositories providing end-funding that insured that funds were available to home buyers. The role of Fannie and Freddie was and still is extremely important to the well being of the economy. The FHFA suit appears to exonerate Fannie and Freddie by passing blame onto the banks. Troubling because one would expect the agencies to exercise due diligence when buying mortgage backed securites or any investment for that matter. In other words, know what you are buying! This didn't happen. In looking at the suit, one cannot ignore the role of a Congress that encouraged the expansion of home-ownership willy-nilly that lowered the lending standards that should have been exercised by Fannie and Freddie. A house cleaning is in order.

    10. Bobbie says:

      Totally agree! Isn't FHFA just admitting the government failed to oversee the position of government? What did we do to deserve this immature, corrupt, ill production by grown adults? I mean really! …and this: "borrowers were tricked into mortgages they could not understand?" excuse and irrelevant! AND anybody can play dumb!! some I'm sure inside jobs involving Realtors also!!!!
      David writes: "borrowers" learn by their mistakes!!!!!" Everyone signs and if someone signed not knowing what was signed the borrowers that sign, pays the penalty! AMERICANS HAVE TO STOP BEING MADE EXCEPTION TO!!!!!! especially immigrants new to America that doesn't mean they should ever be made exception to regarding legal matters that effect the economy!!!!! They lived under corruption they know what it looks like!!!! Everyone learns from their mistakes!!!! If America is freedom, people have to stand on their own two feet exactly what jfk said. "Ask not what your country can do for you. Ask what you can do for your country!!!!" In freedom that's standing on your own two feet and living independently!!
      You work to live and live to want!!!!!

      FREEDOM!!!! LEARN IT!!!!!! and if you're human, you'll love what it can do for you and you for it!!!!

    11. americancaptialism says:

      This is not about Blame, the Housing Bubble (which is really a financing bubble /fraud) nor is about the law. This may be The Obama Administration's most serious attack of class warfare and …"capitalism failed; we've tried it"

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