Fannie and Freddie Seek Mega Damages

September 3rd, 2011
in econ_news

banks-zombies Econintersect: Fannie and Freddie want their money back, or at least some of it. Bank of America, Goldman Sachs, JPMorgan Chase, Deutsche Bank, Citigroup, Barclays and Morgan Stanley are among the defendants in the suits, brought by the Federal Housing Finance Agency, which oversees Fannie and Freddie. Federal regulators filed suit on Friday against more than a dozen leading banks, seeking billions in compensation for huge losses suffered by Fannie Mae and Freddie Mac on mortgage-backed securities the banks assembled during the housing boom.  Click on cartoon for larger image.

Follow up:

According to The New York Times:

In the suit filed against Bank of America, the agency alleges that bank sold securities that “contained materially false or misleading statements and omissions.” The company and several individual bankers named as 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,” the suit says. Fannie Mae and Freddie Mac bought $6 billion in securities from the bank between September 2005 and November 2007.

The legal action opens a broad front in a rapidly growing attempt to force the banks to pay tens of billions of dollars for helping stoke the housing bubble. It was the collapse of the housing market that helped prompt the financial crisis in 2008, and the hangover is still being felt in the housing sector as well as the broader economy.

The amount of money involved for the taxpayers for the failure of Fannie and Freddie has so far totaled $153 billion and it has been estimated that it may cost $210 billion more over the next two years, according to The New York Times.

There have been suits filed against seventeen banks listed in the FHFA press release. They are, in alphabetical order:

  1. Ally Financial Inc. f/k/a GMAC, LLC
  2. Bank of America Corporation
  3. Barclays Bank PLC
  4. Citigroup, Inc.
  5. Countrywide Financial Corporation
  6. Credit Suisse Holdings (USA), Inc.
  7. Deutsche Bank AG
  8. First Horizon National Corporation
  9. General Electric Company
  10. Goldman Sachs & Co.
  11. HSBC North America Holdings, Inc.
  12. JPMorgan Chase & Co.
  13. Merrill Lynch & Co. / First Franklin Financial Corp.
  14. Morgan Stanley
  15. Nomura Holding America Inc.
  16. The Royal Bank of Scotland Group PLC
  17. Société Générale

Each of the individual complaints can be reviewed in full at the FHFA web site.

How much is involved in the suit? The Financial Times says that around $200 billion in securities are itemized in the seventeen complaints. A review of a few of the complaints by GEI has found than many of these securities contain no mortgages with 100% LTV (loan to value) ratios. It is the high LTV mortgages (LTV around 100% and higher) that have a higher probability of default. That means that there is residual value in these MBS (mortgage backed securities) and perhaps a small percentage may eventually default.

Thus, it is impossible to make a quick estimate of how much the banks might ultimately be found liable for. It is likely that the amount could be as small as 10% or 20% of the face value of the securities, which would put the exposure for all seventeen banks at a total of $20 billion (or less) up to $40 billion or so.

If any of these cases find complainants able to prove civil fraud, compensatory damages might be awarded which could swell the awards much higher.

Finally, if the finding of the court is that egregious fraud occurred, rescission could be ordered and the securities ordered restored to the originator and the buyers (Fannie and Freddie) refunded their payments of around $200 billion. It is even possible that compensatory damages could be awarded in addition to rescission.

The ability of the banks to withstand the worst case judgments outlined is questionable.

Editor’s note: How ironic that a possible follow-on to the TARP (Troubled Asset Relief Program), which used part of a $700 billion federal rescue program, might possibly be that the fraudulent activities of some of those rescued banks would find them insolvent following judicial action and that they would become state owned enterprises in the settlement. Of course, that was a course of action that many proposed for zombie banks in early 2009.

Sources:  The New York Times, FHFA Press Release, FHFA web site and Financial Times

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1 comment

  1. If self-dealing lawyers are allowed to both defend against the FHFA lawsuit, and cover their malpractice & criminal conduct, the FHFA lawsuit could be tail wagging the dog. Decades of attorney unjust enrichment, and extortion via “simulated” auctions \ illegal “credit bids” \ properties gained via theft must be terminated! Mortgage fraud is simply not about only INVESTORS. When foreclosures become filed, knowledge of laws & civil procedure is not required from mortgage lenders and bankers.

    Further, Freddie Mac has (knowingly or unknowing) shelled out $$$$$$$$$$$$$$$$$$$$ toward real estate theft, criminal frauds, and social tyranny! This FHFA lawsuit, or some additional one needs investigation and recovery of those moneys. People who acted in furtherance of those financial frauds ought to be brought to justice! With our nation’s high unemployment, self-dealing and unscrupulous exploiting of people who owe debt is ravishing America.

    A factual instance of Freddie Mac’s involvement in foreclosure frauds: A defunct lender’s identity was utilized to place a “credit bid” at a sham foreclosure auction of my home (non-existent lenders cannot bid \ have no“standing”!) From the so-called auction, a deed was recorded into the defunct lender’s name. (void as a recorded Hibernia deed, rather than Capital One.) Six weeks after the so-called auction, Freddie Mac paid an imposter $86,000 for the worthless deed.

    Such in-your-face fraud transactions have continued unaddressed for decades. Fraudulent flipping of real estate make the housing market appear thriving; impresses Investors. In our land of rules and laws, identity theft is criminal, and so is Freddie Mac buying stolen property. However, all that has really mattered were the benefits to be gained by defaulted mortgage loans –even jurists and their allies stand to become enriched from foreclosures. Moreover, acceptable practices include crippling property owners who interfere with foreclosure objectives!

    HUNDREDS OF PEOPLE have experienced some form of abusive, illegal tactics associated with owing debt, and have signed this petition. Their names and pleas can be seen here:

    Equally as important to America as Investors, they are pleading for help –because they too are victims of the Feds’ failure to properly oversee, regulate, and rein in mortgage industries.

    I continue speaking out because attention to foreclosure crisis is vital in this area, while the monster roams! A monster is so brazen, it sets forth its asinine contentions about defaulted borrowers unentitled to know why they’re being forced to abet mortgage frauds, subjected to invaded privacy, Constitutional wrongs, threats, etc. –all directly associated with real estate frauds. These all the more make is essential to tell the facts of how egregious and far reaching is mortgage fraud.

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