Wednesday, September 7, 2011

U.S. Sues 17 Banks Over Mortgage Losses

The Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac, is suing 17 of the nation’s largest lenders over about $200 billion in investment losses that severely battered Fannie and Freddie nearly three years ago.

FHFA is accusing lenders in the lawsuit of misrepresenting the worth of the mortgage securities they arranged and sold. Bank of America Corp., Citigroup Inc., J.P. Morgan Chase Deutsche Bank AG, General Electric Co., and others were named in the lawsuit, which was filed Friday in federal and state court in three jurisdictions.

FHFA alleges in the lawsuit that the losses that Fannie Mae and Freddie Mac incurred were from mortgage investments that had riskier characteristics than "the descriptions contained in the marketing and sales materials" provided to the government-sponsored enterprises. They also allege that the banks failed to identify proof that borrowers’ incomes were overstated or fake, and the securities rapidly lost value when borrowers were unable to make their payments.

The lawsuit represents one of the biggest against banks since the housing crisis, as banks continue to face legal trouble in recent months. Some critics say the mounting lawsuits against banks threatens to tighten credit and undermine the housing recovery.

"The government is coming at the banks from every direction — the FHFA lawsuits being the most recent example — at the same time the government is putting enormous pressure on the banks to extend credit to help alleviate the housing crisis," Andrew Sandler, co-chairman of BuckleySandler LLP, a law firm representing banks in litigation and regulatory enforcement actions, told The Wall Street Journal. "It constitutes a completely incoherent government approach to the housing crisis."

Meanwhile, in a separate case, the Financial Times reported Tuesday that several big banks are in talks over a possible settlement with state prosecutors over accusations of improper mortgage practices. The settlement reportedly would limit the banks’ legal liabilities in return for a multibillion dollar payment, the Financial Times reported. The allegations against banks such as

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