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Feds File Lawsuits Against Mortgage Companies

Posted on | September 6, 2011 | No Comments

The federal agency overseeing Fannie Mae and Freddie Mac filed lawsuits Friday against 17 financial institutions, in an attempt to recover billions of dollars in losses from risky mortgage investments.

The lawsuits were filed against many of the nation’s largest Wall Street and financial firms, including Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500). (See full list at end of story.)

In the complaints, the Federal Housing Finance Agency contends the institutions misrepresented the quality of the investments’ underlying loans.
“Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials,” the agency said in a press release.

The misrepresentations included significantly overstating borrowers’ ability to repay their mortgages, the number of loans on owner-occupied properties, and amount of debt on those homes relative to their values.

Fannie Mae and Freddie Mac bought more than $196 billion of these residential mortgage-backed securities from the named financial institutions in the middle of the last decade, according to the suits.

These bundles of home loans were hot investments during the housing boom, helping fuel the proliferation of mortgage lending and run up in home prices. But when the market crashed and homeowners defaulted in droves, the securities plummeted in value.
Fannie Mae and Freddie Mac, which were among the biggest purchasers of these securities, also got caught in the downdraft.

Bank of America countered that Fannie Mae and Freddie Mac said they understood the risks of investing in subprime securities. And Bank of America said that the companies continued to add to their holdings, even after their regulator told them they didn’t have the needed risk management.

“Despite this, the [companies] are now seeking to hold other market participants responsible for their losses,” Bank of America said in a statement. Bank of America reached an $8.5 billion settlement with a group of investors in June over the poor quality of the mortgage investments.

Meanwhile, attorneys general around the nation are trying to negotiate a settlement with mortgage servicers over their faulty foreclosure practices.

And earlier this year, Bank of America reached a $3 billion agreement with Fannie Mae and Freddie Mac over bad mortgages sold to the companies by Countrywide Financial.
Citigroup, Goldman Sachs and JPMorgan Chase declined to comment. Other financial institutions could not immediately be reached for comment.

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