March 8, 2021

Federal Regulators Sue Big Banks Over Mortgages

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, the government-backed organizations that finance much of the nation’s mortgage market.

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 litigation also marks a more intense effort by the federal government to go after the financial services industry for its alleged mortgage misdeeds. The Obama administration as well as regulators like the Federal Reserve have been criticized for going too easy on the banks, which benefited from a $700 billion bailout package shortly after the collapse of Lehman Brothers in the fall of 2008.

Much of that money has been repaid by the banks — but the rescue of 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 face tens of billions in legal bills from other plaintiffs, including private investors, the suits filed Friday could cost them far more. In the case of Bank of America, for example, the suit alleges that Fannie and Freddie bought more than $50 billion worth of risky mortgage securities from the bank and two companies it subsequently acquired, Merrill Lynch and Countrywide Financial.

The filing does not cite the total losses the government wants to recover, but in a similar case brought this summer against UBS, the government is trying to recover $900 million in losses on $4.5 billion in securities. A similar 20 percent claim against Bank of America could equal a $10 billion hit.

In the suit that identifies 23 securities that Bank of America sold for $6 billion, the company “caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial.”

Other large banks also assembled huge amounts of so-called private-label mortgage-backed securities for Fannie and Freddie that declined sharply in value after the housing bubble burst in 2007. JPMorgan Chase sold $33 billion, while Morgan Stanley sold over $10 billion and Goldman Sachs sold more than $11 billion. A who’s who of foreign banks were also big bundlers and sellers of these securities, such as Deutsche Bank ($14.2 billion), Royal Bank of Scotland ($30.4 billion) and Credit Suisse ($14.1 billion).

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 defendants include the company; several units of the bank, including Banc of America Mortgage Securities; and a dozen individuals, such as the chief executive and directors of the mortgage unit. Each defendant had a role in the process, the suit says, from buying home loans from originators to bundling those loans into securities to marketing and selling those securities to Fannie and Freddie.

The defendants vouched for key criteria behind the loans, ranging from the credit score of a borrower to the ratio of the balance of the loan to the value of the house to whether the borrower lived in the home, the suit says.

It alleges that the defendants “had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness (of those assurances) or conducting adequate and reasonable due diligence.”

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