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U.S. to sue BIG banks; the chicken guardin' the fox??
Topic Started: Sep 1 2011, 10:31 PM (278 Views)
kbp

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

By NELSON D. SCHWARTZ


The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.

The impending litigation underscores how almost exactly three years after the collapse of Lehman Brothers and the beginning of a financial crisis caused in large part by subprime lending, the legal fallout is mounting.

Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.

And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.

Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”

But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.

Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.

Bank officials also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy. Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.

The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.

“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.

The suits are being filed now because regulators are concerned that it will be much harder to make claims after a three-year statue of limitations expires on Wednesday, the third anniversary of the federal takeover of Fannie Mae and Freddie Mac.

While the banks put together tens of billions of dollars in mortgage securities backed by risky loans, the Federal Housing Finance Agency is not seeking the total amount in compensation because some of the mortgages are still good and the investments still carry some value. In the UBS suit, the agency said it owned $4.5 billion worth of mortgages, with losses totaling $900 million. Negotiations between the agency and UBS have yielded little progress.

The two mortgage giants acquired the securities in the years before the housing market collapsed as they expanded rapidly and looked for new investments that were seemingly safe. At issue in this case are so-called private-label securities that were backed by subprime and other risky loans but were rated as safe AAA investments by the ratings agencies.

In the years before 2007, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel of the finance agency until January 2010. “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."

[pay close attention to the rest of the story]
Fannie and Freddie had other reasons to buy the securities, Mr. Rood added. For starters, they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.

In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.

“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.

In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.





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kbp

...In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.

The STANDARDS for those loans Fannie and Freddie back are NOT set by the BIG banks!


“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.

The "housing goals" relate not to the total number of houses, to the total number held by select groups.


As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion

Look at the TYPES of loans they hold!

So now Fannie's idea is others make the loans, they'll back them up and when $#!% hits the fan they'll require others to back them?

A good portion of this all starts with the former car salesman helping a couple fill out a loan application, attaching a couple tax retruns and pay stubs, shipping the papers to a title office, who then often send it to a middleman who passes it along to the BIG banks and a few other companies, which then bundle and sell it in blocks of big round numbers.

I can't imagine the next to last stop knowing much more about the pay stubs than the former car salesman, and the STANDARD procedures are established by those backing those mortgage packages.

WHO ESTABLISHED THE STANDARD PROCEDURES FOR THE INDUSTRY?

Here's a clue to start with;
"...by law Fannie and Freddie were required to back loans "
Edited by kbp, Sep 1 2011, 10:49 PM.
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LTC8K6
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Assistant to The Devil Himself
So it wasn't Bush's fault then?
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kbp

Truthfully, I recall Bush promoting some housing program, but am uncertain if he started it, went along because of some political reason(s), or if that speech was unrelated to the subprime standards.

I have no doubt about who a few were that had their hands all over the Fannie & Freddie operations.
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LTC8K6
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http://news.yahoo.com/robo-signed-mortgage-docs-date-back-1990s-213439564.html

Rampant robo signing of mortgages goes back to the 1990's...
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kbp

Watchdog sues 17 groups over securities

snip

Banks reacted angrily to the move. BofA said Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities” and yet were “now seeking to hold other market participants responsible for their losses”.

Another person on the banks’ side said: “These are the world’s greatest experts on mortgages. How can they be misled?”

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chatham
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Where is barney when ya need some truth?
Edited by chatham, Sep 2 2011, 06:42 PM.
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LTC8K6
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Assistant to The Devil Himself
They sued the banks to get them to ease their standards and lend more money. This was what Barry did for a living. He sued to get the banks to make risky loans to people who couldn't afford them. They forced banks to do the risky mortgages.
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kbp

The banks did not write all these mortgages or make the rules for them. Ben was praising them, the man running the world currency market.

The lawsuit would have to be a claim that the banks misrepresented the paper they obtained from others.

I had read that Fannie & freddie do not want refunds for the mortgage security packages they are making claims for, only the money they say was lost. That's a hint.
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kbp


U.S. Said to Prepare Mortgage Lawsuit Against BofA, JPMorgan

By Dawn Kopecki and Laura Marcinek - Sep 2, 2011

Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) are among lenders that may face a lawsuit by the U.S. Federal Housing Finance Agency over faulty mortgage loans, according to six people with knowledge of the matter.

The agency representing Fannie Mae and Freddie Mac is likely to act before next week’s deadline for legal claims, according to the people, who weren’t authorized to speak publicly. The amount may dwarf the $20 billion sought from the biggest mortgage servicers in a separate probe of lending and foreclosures by 50 state attorneys general, one person said.

Bank of America led declines in shares of U.S. lenders after the suit was reported in the New York Times earlier today. The FHFA has been demanding refunds from banks for loans sold to Fannie Mae and Freddie Mac that were based on false or missing information about borrowers and properties. The two government-backed mortgage finance firms had to be rescued by taxpayers as defaults on home loans soared toward record levels.

A lawsuit “is an uncertainty that can go on for years --that gets the market quite nervous,” said Nader Naeimi, a Sydney-based strategist for AMP Capital Investors Ltd., which manages almost $100 billion. “Bank of America, being at the epicenter of these problems, is going to get smashed.”
Bank of America, based in Charlotte, North Carolina and the largest U.S. lender by assets, fell 66 cents, or 8.3 percent, to $7.25 at 3:27 p.m. in New York Stock Exchange composite trading. JPMorgan and Citigroup Inc. (C), both based in New York, slipped more than 4.5 percent, while San Francisco-based Wells Fargo & Co. (WFC), the biggest U.S. home lender, declined 4.4 percent.

Pressure on Shares
“Any bad news such as new lawsuits is inevitably going to put the stock under pressure,” said Richard Staite, an analyst at Atlantic Equities in London, referring to Bank of America.“There is a question hanging over the company as to whether it needs to raise new equity. If the lawsuit was to result in significant new losses, then it becomes more likely that the company might need to raise equity, which would be a difficult thing to do in the current market.”

Bank of America, JPMorgan, Goldman Sachs Group Inc. (GS) andDeutsche Bank AG (DBK) are among firms that may be sued by the agency for misrepresenting the quality of mortgage securities sold at the height of the housing bubble, the Times said. Morgan Stanley is likely to be included in the lawsuit, according to one of the people.

Mortgage Overhang
A separate report in the Wall Street Journal said Bank of America was told by the Federal Reserve to explain what steps it would take if its financial condition worsens. Chief Executive Officer Brian T. Moynihan has committed more than $30 billion to quelling claims for faulty mortgages since he took the top job in 2010.
[Is this some backdoor CYA? Banks are raking it in now just borrowing from the Federal Reserve and getting a couple percentage points of return at the other end of the government cash flow.]

“It doesn’t surprise me when we wake up and there’s somebody else trying to sue them,” said Marty Mosby, a Nashville, Tennessee-based analyst with Guggenheim Securities LLC. “The overhang and the pressure related to this residential real estate isn’t going away any time soon.”

The lawsuit involves purchases by Fannie Mae and Freddie Mac before the financial crisis in 2008 of private-label mortgage securities, which were assembled by firms that lack government guarantees, said two people with knowledge of plans for the lawsuit.

The suit will claim that banks misrepresented the quality of the underlying mortgages in the securities and thus are bound by their contracts to reimburse any losses, the two people said. Banks typically offer “representations and warranties” about the quality and terms of the loans, which includes a promise to buy back the loans or make up the difference if they decline in value. The FHFA plans to demand the latter, the people said.

Legal Options
Analysts and former regulators have said the cumulative impact of lawsuits from different agencies could backfire by imperiling the health of some banks. This could trigger a new round of bailouts that will hurt the same taxpayers that the government is trying to protect, they have said.
Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, said via e-mail he’s “strongly opposed” to regulatory forbearance for the lenders, and that any further aid to banks should come with transparency and accountability.

‘Off the Cliff’
“The government needs to be as aggressive as possible to vindicate the taxpayers’ rights to get as much money from the big banks as possible,” Barofsky said earlier on Bloomberg Television. “If this ends up pushing them off the cliff and putting them in a position where they need to be bailed out again, that bailout should be done through the front door.”

The FHFA’s lawsuit may be motivated mainly by a desire to keep its options open as the deadline for filing legal claims approaches, according to two people with ties to the banks. Negotiations were under way, and in other circumstances a lawsuit and resolution would be announced together, one person said. With the deadline looming, the FHFA may be planning to preserve its legal rights and then return to settlement talks, the person said.

“We are not discussing our litigation,” said Stefanie Johnson, a spokeswoman at the FHFA. Officials at the lenders said they couldn’t comment. In a memo to Bank of America employees, Chief Financial Officer Bruce Thompson said the lender had made “tremendous progress” in resolving claims.

UBS Lawsuit
The bank is being sued now because in many cases, the statutes of limitations have been running out, he wrote. “Now we have to simply let the judicial process work.”

The costs so far and the prospect of even more claims caused some investors to question whether the bank may need more capital. Thompson said Bank of America has “more than enough capital to run our business” and said the lender doesn’t intend to issue more common stock to meet new regulatory standards starting in 2013. “There are many non-dilutive ways for us to get there,” he wrote.

The FHFA sued UBS AG, Switzerland’s biggest bank, in July over $4.5 billion in residential mortgage-backed securities sold to Fannie and Freddie, claiming they misstated the risks of the investments. The suit seeks unspecified damages.

Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

BofA’s Options
Responding to the Fed’s call for an explanation of how Bank of America would respond to a deterioration in its financial condition, the lender outlined options including the issuance of a separate class of shares linked to the performance of its Merrill Lynch brokerage unit, the Wall Street Journal reported, citing people familiar with the matter. Such a step isn’t imminent, the newspaper said.

“I can’t imagine that it could be structured in an attractive way,” Staite said. “It doesn’t make sense for them to try to separate Merrill and list it separately.”

To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net; Laura Marcinek in New York at lmarcinek3@bloomberg.net.
To contact the editor responsible for this story:Rick Green in New York at rgreen18@bloomberg.net
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kbp

This is a very confusing situation and I doubt we’ll ever know WTH is really going on. My first impression was not correct; these mortgage-backed security (MBS) packages were NOT guaranteed by any GSE, like Fannie or Freddie. Evidently they were not insured by private insurance companies either.

There are so many different types of ratings for mortgage packages, how the rules apply is a maze I can’t follow, but here are a few quotes (and my comments) from the article above that may be of importance;

(1) “The FHFA has been demanding refunds from banks for loans sold to Fannie Mae and Freddie Mac that were based on false or missing information about borrowers and properties.”
[What is/was missing that is always present when the Fannie mortgage experts guarantee similar packages ….those “experts” being Fannie & Freddie who are purchased these packages?]


(2) “A separate report in the Wall Street Journal said Bank of America was told by the Federal Reserve to explain what steps it would take if its financial condition worsens. Chief Executive Officer Brian T. Moynihan has committed more than $30 billion to quelling claims for faulty mortgages since he took the top job in 2010.”
[While one arm of the government is looking to recover funds for Fannie… another arm is working to see what’s necessary to keep the defendant above water?]

(3) “The lawsuit involves purchases by Fannie Mae and Freddie Mac before the financial crisis in 2008 of private-label mortgage securities, which were assembled by firms that lack government guarantees, said two people with knowledge of plans for the lawsuit.

The suit will claim that banks misrepresented the quality of the underlying mortgages in the securities and thus are bound by their contracts to reimburse any losses, the two people said. Banks typically offer “representations and warranties” about the quality and terms of the loans, which includes a promise to buy back the loans or make up the difference if they decline in value. The FHFA plans to demand the latter, the people said.”

[Why is the government wanting ONLY reimbursement for losses and NOT to dump the mortgages back in the banks lap, which would lead to the banks foreclosing and recovering whatever they could, instead of carrying the cost of holding the mortgages or properties involved?]

So it looks like we have:
(1) Evidence telling us the brilliant experts at Fannie & Freddie have no clue in HOW to review mortgage investments, only how to guarantee them for private investors (so nobody checks the actual values);

(2) A situation where the whole dollar losses on Fannie’s books MAY be offset by banks, “private” entities which in turn MAY receive bailouts or other favors from Ben, the man that MAY hide (sorta) the actual costs with his digital printer; and

(3) The backdoor CURE for the Fannie group problems, such problems NOBODY seems to have proposed a solution for since the numbers started going sour 4 years ago.

This Fannie fiasco has been pushed off for quite some time now, but it’s a given that NOBODY in politics wants to reinvent the wheel here …just continuously provide them new spares to keep rolling downhill.

With it being 110% obvious that the housing/construction market needs some sort of help, nobody would want to do anything that could possibly make it fall even further than it already has.

It’s looking like a prime situation to resort to any plan that helps Fannie and hides the actual costs ….and banks need the mortgage business to recover …they like those fees earned passing the loans along in packages.

I recall that one of the big banks allegedly bet on the decline of the mortgage market while selling mortgage packages. Makes me wonder if records of earnings for such action will secretly determine how much they will have to lose back to Fannie and how much they might recover back from Ben’s moves.

The brief outline of how it appears to be happening is Fed (Fannie) wants money from banks, then the banks will need money from the Fed (Ben) to survive ...like one branch of our federal government filing claims against another ...what a circle it could be!

This whole lawsuit mess here smells fishy and it's my guess that I’ll never know for certain what is going on ….but I also know what I suspect could be going on.
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