FHFA to Sue Big Banks over Mortgage Bond Losses

The federal regulator for mortgage lending giants Freddie Mac and Fannie Mae is planning to sue the nation’s largest banks over mortgage bonds gone wrong. The suit is expected to help the government recoup billions of dollars in losses from the failed investments.

Big Banks Accused of Misleading Investors

According to the Wall Street Journal, people who are familiar with the matter say the lawsuits are to be filed by the Federal Housing Finance Agency (FHFA), which was organized to conserve the assets of the failed mortgage giants. The suits are expected to allege that mortgages securitized by Wall Street firms and other issuers misled investors about the quality of loans.

The inquiry into these investments has focused on the “private label” securities based on subprime mortgages and other risky loans that were originated by mortgage companies, packaged by Wall Street firms then sold to investors.

The loans backing these securities required little-to-no documentation of a borrower’s income, which meant they were not just risky investments, there was a good possibility that they could fail.

While Fannie and Freddie didn’t purchase these loans directly, they were allowed to invest in slices of the securities that carried triple-A ratings. The two giants ended up being among the largest investors in the “private label” securities, which were among the poorest performing of the lot.

FHFA Has Already Initiated Lawsuits

Sources say this is not the FHFA’s first attempt to sue. In fact, it filed the first of what could end up being around one dozen lawsuits in July against UBS AG. That lawsuit alone seeks $900 million in damages for false statements made about 16 mortgage-backed securities it sold to Fannie and Freddie from fall 2005 to summer 2007.

The FHFA also issued 64 subpoenas last year to issuers and servicers of mortgage-backed securities in what has become one of the largest investigations of potential securities fraud to date from the mortgage boom and bust.

The FHFA isn’t the only agency that has been suing big banks over mortgage securities. According to company filings with the Securities and Exchange Commission, Fannie and Freddie have already recouped around $18 billion from banks since the beginning of 2010.

Also, private investors have sought to recoup losses from Bank of America with which they reached an $8.5 billion settlement.

The FHFA is expected to file its lawsuit in the coming days. The exact amount it hopes to recoup has yet to be disclosed.