Feds sue over losses to Fannie Mae and Freddie Mac

By Jessica M. Karmasek | Sep 6, 2011


WASHINGTON (Legal Newsline) - The Federal Housing Finance Authority on Friday filed lawsuits against 17 financial institutions to recover losses to Fannie Mae and Freddie Mac.

The suits filed by the FHFA allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities to Fannie Mae and Freddie Mac.

Complaints were filed against Ally Financial Inc. f/k/a GMAC LLC, Bank of America Corp., Barclays Bank PLC, Citigroup Inc., Countrywide Financial Corp., Credit Suisse Holdings (USA) Inc., Deutsche Bank AG, First Horizon National Corp., General Electric Co., Goldman Sachs & Co., HSBC North America Holdings Inc., JPMorgan Chase & Co., Merrill Lynch & Co. / First Franklin Financial Corp., Morgan Stanley, Nomura Holding America Inc., The Royal Bank of Scotland Group PLC and Societe Generale.

The complaints, filed in federal and state court in New York and federal court in Connecticut, seek damages and civil penalties under the Securities Act of 1933.

In addition, each complaint seeks compensatory damages for negligent misrepresentation.

As conservator of Fannie Mae and Freddie Mac, the FHFA is charged with preserving and conserving the companies' assets on behalf of taxpayers.

According to the FHFA, the complaints filed Friday reflect its conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities are attributable to misrepresentations and other improper actions by the firms and individuals named in the filings.

The federal agency alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to Fannie Mae and Freddie Mac for those securities.

In a statement last week, the FHFA said discussions regarding these matters have taken place with several of the firms receiving complaints and, "where constructive," they will continue.

Also last week, Nevada Attorney General Catherine Cortez Masto filed an updated complaint against Bank of America and Countrywide, making similar accusations of misrepresentation.

The amended complaint contains new allegations that Bank of America violated a consent judgment, namely that it:

- Increased consumers' interest rates and monthly payments, even though the consent judgment allows only modifications that decrease consumers' interest rates, actually leaving consumers worse off; and

- Required consumers to provide extensive documentation -- including pay stubs, tax returns and sworn affidavits -- to qualify for modifications, despite the consent judgment's promise of streamlined modifications.

The attorney general's amended complaint also alleges that the bank engaged in "deceptive practices," resulting in an "explosion" of delinquencies and unauthorized and unnecessary foreclosures in Nevada, stripping homeowners of their assets, dislocating families, blighting neighborhoods and deeply disrupting the state's housing market.

Masto also went after Countrywide.

She alleges that the bank failed to disclose and affirmatively misrepresented that loans like its Payment Option Adjustable Rate Mortgages, or Option ARMS, and Hybrid Adjustable Rate Mortgages, or Hybrid ARMS, were originated at low teaser raters, in effect only for a short time, and that payment on these loans would increase dramatically -- often more than double the original rate -- when the teaser period expired or the loans reset or recast.

In addition, the attorney general says Countrywide did not disclose that consumers who made only a minimum payment, based on that low teaser rate, would experience negative amortization, which would cause them to fall deeper in debt.

Masto has said she is going to be "cautious" about whether to sign onto a rumored $20 billion settlement with the nation's five largest mortgage servicers -- Bank of America, Wells Fargo & Co., JPMorgan Chase, Citigroup and Ally Financial -- especially if it could impact her state's own litigation.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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