Regulator Defends Suit Against Lenders Over Mortgage-Backed Securities

The U.S. Federal Housing Finance Agency said Tuesday it decided to file lawsuits against 17 financial institutions last week because the firms misrepresented the mortgages in securities filings.

“At the heart of the suits is FHFA’s conclusion that the actual mortgages backing many of the securities had characteristics that differed in a material way from what had been represented in securities filings,” the agency, which regulates mortgage firms Fannie Mae and Freddie Mac , said in a statement.

The lawsuits filed by FHFA on Friday accused lenders, including Bank of America Corp. and its Countrywide and Merrill Lynch units, of misrepresenting the checks they had done on mortgages before bundling them into securities. The claims rely on provisions of federal securities law.

The regulator is seeking unspecified damages against the banks on about $200 billion in mortgage investments that were bought by Fannie and Freddie, mostly between 2005 and 2008.

FHFA said in its statement on Tuesday that the amount that might be recovered would be determined by the courts, and that it was “premature” to estimate recoverable damages.

However, it said the amount would be below $200 billion, since that figure represents the original amount of securities purchased, not the actual losses incurred.

The agency said the seller of the mortgage bonds has a “legal responsibility to accurately represent the characteristics of the loans backing the securities being sold.”

Nearly all the banks that were sued last week declined to comment or were not immediately available for comment on Friday. Others called the charges unfounded.

“Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more,” said Mayura Hooper, a spokeswoman for defendant Deutsche Bank AG, in a statement.

FHFA said on Tuesday that the sophistication of Fannie and Freddie were not the issue.

“Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold,” it said.

According to the lawsuits, the securities should have never been sold because the underlying mortgages did not meet investors’ criteria.

(Reporting by Margaret Chadbourn; Editing by Andrew Hay)

Topics Lawsuits