Federal Government Sues Banks Over Faulty Loans

A few weeks ago, the Federal Housing Finance Agency (the “FHFA”) sued a number of banks, accusing them of misrepresenting the quality of mortgage-backed securities they sold during the height of the housing bubble.  Among the 17 financial giants sued were Bank of America, J.P. Morgan Chase, and Goldman Sachs.

The FHFA alleges that the banks failed to perform the due diligence required under the law and that the securities were sold with registration statements and prospectuses that “contained materially false or misleading statements and omissions.”  The FHFA further argues that the banks knew, or should have known, that the mortgage securities they were bundling were based on fraudulent or bad loans.

The FHFA claims that due to this lack of due diligence, borrowers defaulted on their loans and the value of the securities backed by the loans declined dramatically.  The FHFA suits also accuse the defendants of selling bonds backed by mortgages that should not have been packaged into securities.

The FHFA, which oversees Fannie Mae and Freddie Mac, claims that as a result of the faulty loans, Fannie and Freddie lost billions.  The FHFA is charged with preserving and conserving these companies’ assets and does so on behalf of taxpayers.

The FHFA lawsuits cap a rough time for the nation’s major banks, many of which are already facing potential payouts of billions of dollars to settle other charges of abusive regulatory mortgage lending and foreclosure practices.  Bank of America was also sued last month by AIG which seeks $10 billion in damages for misrepresenting the quality of securities it was selling.

The FHFA complaints seek damages and civil penalties under the Securities Act of 1933.  In addition, each lawsuit seeks compensatory damages for negligent misrepresentation.

While the amount FHFA seeks to recover is unclear, it is estimated to top $40 billion.  It is also anticipated that these FHFA suits will affect the ability of banks to lend money, thereby adding salt to an already wounded housing market.