Now here’s a Friday afternoon news dump: the FHFA, as expected, went ahead with their lawsuits against major banks, 17 in all, over mortgage backed securities purchased by Fannie Mae and Freddie Mac. The lawsuits cover $105 billion worth of securities, and FHFA wants returns on some portion of the losses taken on the securities, which they attribute to illegal actions by the banks when they sold the MBS (specifically, misrepresentations about the underlying loans). Earlier reports said that the losses for Fannie and Freddie on private-label MBS came to around $30 billion, so that’s probably around what they will ask for. The LA Times story puts it at $41 billion in losses. Whatever the number, this is more than the 50 state AG settlement is reportedly attempting to extract from the banks for a liability release over ALL issues in foreclosure fraud. And this is just a representations and warrants case. That’s what LAT says too:

The question of whether to take action for problems related to the mortgage bonds has been under discussion since Fannie Mae and Freddie Mac were placed in conservatorship in 2008, a person familiar with the matter said.

While the ultimate amount FHFA will seek is still unclear, that person said it could top the $20 billion being discussed by the banks and the state attorneys general.

The banks being sued are:

Ally Financial Inc. f/k/a GMAC, LLC
Bank of America Corporation
Barclays Bank PLC
Citigroup, Inc.
Countrywide Financial Corporation
Credit Suisse Holdings (USA), Inc.
Deutsche Bank AG
First Horizon National Corporation
General Electric Company
Goldman Sachs & Co.
HSBC North America Holdings, Inc.
JPMorgan Chase & Co.
Merrill Lynch & Co. / First Franklin Financial Corp.
Morgan Stanley
Nomura Holding America Inc.
The Royal Bank of Scotland Group PLC
Société Générale

This doesn’t include the active lawsuit filed by the FHFA in July against UBS. So 18 domestic and international banks in all.

The full list, including links to the lawsuits, is here, and Zero Hedge has a press release announcing the suits. Note this portion:

These complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933, similar in content to the complaint FHFA filed against UBS Americas, Inc. on July 27, 2011. In addition, each complaint seeks compensatory damages for negligent misrepresentation. Certain complaints also allege state securities law violations or common law fraud.

Yes, the word “fraud” makes its way into a federal filing against the banks.

Just looking at the Bank of America lawsuit, this is a pretty solid case with a ton of documentation. FHFA highlights the work of the FCIC and the testimony of Clayton Holdings, which revealed the enormous failures in underwriting standards in the loans packaged into MBS (which banks knew about, didn’t reveal to investors, and used to get discounts from the originators). It also mentions Eric Schneiderman’s investigation of securitization:

In the period from the first quarter of 2006 to the second quarter of 2007, 30 percent of the mortgage loans BOA submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 27 percent of the loans were subsequently waived in by BOA without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here.

This is the right thing to do. As Rep. Brad Miller (D-NC) said in a statement lauding the FHFA action, “I don’t agree with Mr. DeMarco on every issue, but I have consistently supported  FHFA’s efforts to pursue legitimate claims for fraud and breach of contract to limit taxpayer losses. Not pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already. The American people should expect their government not to give the biggest banks a backdoor bailout.”

The point is that FHFA is just a canary in the coalmine for the losses and the liability that these banks are holding because of their actions in mortgage origination, securitization, and servicing. You cannot have a banking sector with this many liabilities and expect a robust, well-functioning economy. This action is necessary for the rule of law as well as for the health of the nation.

David Dayen

David Dayen