Federal Housing Finance Agency Files Lawsuits against 17 Financial Institutions Including BoFA, Deutsche Bank

• By: Staff Editor
• Date: September 09, 2011

The Federal Housing Finance Agency has sued 17 financial institutions for allegedly violating federal securities laws and common law in the sale of residential private-label mortgage-backed securities (PLS) to the federal lending enterprises, Fannie Mae and Freddie Mac. The FHFA’s complaints were filed under the broad authority granted to it by the Housing and Economic Recovery Act of 2008.

The FHFA 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. The agency, as conservator of these companies, is responsible for preserving and conserving their assets.

Following its review of the losses incurred by the two companies, the FHFA concluded that some portion of these were attributable to “misrepresentations and other improper actions by the firms and individuals named in these filings.”

The FHFA alleges in its complaints that the loans had different and riskier characteristics than the descriptions contained in the marketing and sales materials provided for those securities.

The following financial institutions were sued by the FHFA:

1. Ally Financial Inc. f/k/a GMAC, LLC
2. Bank of America Corporation
3. Barclays Bank PLC
4. Citigroup, Inc.
5. Countrywide Financial Corporation
6. Credit Suisse Holdings (USA), Inc.
7. Deutsche Bank AG
8. First Horizon National Corporation
9. General Electric Company
10. Goldman Sachs & Co.
11. HSBC North America Holdings, Inc.
12. JPMorgan Chase & Co.
13. Merrill Lynch & Co. / First Franklin Financial Corp.
14. Morgan Stanley
15. Nomura Holding America Inc.
16. The Royal Bank of Scotland Group PLC
17. Société Générale

The FHFA lawsuits seek damages and civil penalties under the Securities Act of 1933. They are similar in content to the FHFA lawsuit filed against UBS Americas Inc. in July. Each suit seeks compensatory damages for negligent misrepresentation.

Certain complaints filed by the FHFA also allege state securities law violations or common law fraud. For example, the FHFA complaint against Merrill Lynch states:

“These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans.”

Response from Industry

Industry groups have criticized the FHFA’s actions, saying they could lead to billion dollar losses for the companies. John McDonald, an analyst with Sanford Bernstein, basing his findings on the agency’s claims against UBS, estimated that banks could lose around $39 billion dollars in total if the FHFA wins.

According to Bloomberg, Paul Miller, an analyst with FBR Capital Markets & Co. said in a research note that the government had to “stop punishing banks” and trying to recover Fannie Mae and Freddie Mac’s losses from the banks would hurt the economy further.

Response from FHFA

On September 6, the FHFA released a statement saying that estimating losses to or recoveries from banks was “premature potentially misleading.” The agency said that the amount would be below $200 billion as that was the original amount of securities purchased.

The FHFA also said in the statement that:

“Some have claimed that these suits will disrupt economic recovery, or endanger the targeted banks, or increase their cost of capital. While everyone is concerned with these important issues, the long-term stability and resilience of the nation's financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during periods of economic difficulty as they form the foundation for our nation's financial system. Therefore, through these lawsuits, FHFA turns to the courts to adjudicate the violations that it has alleged in its complaints.”

Additional Resources:

Read the Securities Act of 1933 in full