A bruising legal fight pitting the country’s most powerful banks against the full force of the United States government began Friday, as federal regulators filed suits against 17 financial institutions that sold the mortgage giants Fannie Mae and Freddie Mac nearly $200 billion in mortgage-backed securities that later soured.
The suits are the latest legal salvo fired at the banks accusing them of misdeeds during the housing boom. The litigation represents a more intense effort by the federal government to go after the financial services industry for its supposed mortgage failures.
Much of that money has been repaid by the banks — but the rescue of the mortgage giants Fannie and Freddie has already cost taxpayers $153 billion, and the federal government estimates the effort could cost $363 billion through 2013.
Even though the banks already face high legal bills from actions brought by other plaintiffs, including private investors, the suits filed Friday could cost the banks far more. In the case against Bank of America, for example, the suit claims that Fannie and Freddie bought more than $57 billion worth of risky mortgage securities from the bank and two companies it also acquired, Merrill Lynch and Countrywide Financial.
Federal regulators launched a broad legal assault on big banks Friday, claiming they sold nearly $200 billion in fraudulent mortgage investments to housing giants Fannie Mae and Freddie Mac that led to massive losses during the financial crisis.
The suits, brought by the Federal Housing Finance Agency, name 17 domestic and foreign banks as defendants. Among them: Bank of America, J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Citigroup and Deutsche Bank.
Some financial analysts said the lawsuits came at a particularly bad time because bank lending was sluggish. Others argued that Fannie and Freddie were sophisticated investors who helped shape the securities they purchased.
The banks are big boys. Fannie Mae and Freddie Mac are big boys. The people who invested in private securities are big boys.”
Added another bank official: “These are folks that were involved in creating these securities. The biggest came against Bank of America and its Merrill Lynch and Countrywide Financial divisions, which together are facing claims on about $57.5 billion worth of securities sold to Fannie and Freddie. After Bank of America, the banks accused of selling the largest totals of allegedly fraudulent securities were J.P. Morgan with $33 billion and Royal Bank of Scotland with $30.4 billion.
In a statement Friday, the bank argued that Fannie and Freddie previously have acknowledged “that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment. The FHFA lawsuits say that the banks routinely assembled mortgage investments using loans that had been singled out as falling short of guidelines. The abundance of mortgage-backed securities created by the financial industry during the lead-up to the crisis continues to cost some firms dearly.
The FHFA’s actions against the banks aren’t unprecedented. In July, the agency filed a similar suit against UBS Americas in a federal court in New York, alleging federal securities law violations. The case accuses UBS of misleading investors who bought into pools of loans that had been packed together into mortgage-backed securities. Fannie and Freddie loaded up on mortgage-backed securities during the years of the housing boom, many of them backed by risky loans, and suffered staggering losses when the real estate market collapsed.
In early August, following a last-minute deal in Congress to raise the nation's debt ceiling, Standard & Poor's downgraded the U.S. government's credit rating.
This lower rating reflects S&P's reduced confidence in the U.S. government's ability to repay its debts over time.
Secondly, today's historically low mortgage interest rates would still be considered low if they increased slightly.
"Mortgage rates will most likely move in the same direction as the government borrowing rate, because there is government backing of mortgages on nearly all mortgage originations in today's market.