FHFA Sues 17 Banks, 132 Individuals Over MBS

by devteam September 7th, 2011 | Share

Seventeen banks, dozens of their subsidiaries and overrnone hundred bank officers were named as defendants in a lawsuit filed Friday byrnthe Federal Housing Finance Agency (FHFA), conservator of government sponsoredrnenterprises Freddie Mac and Fannie Mae (The GSEs.)  The civil suits, filed in U.S. District Courtrnfor the Southern District of New York and a federal court in Connecticut allegernviolations of federal securities laws and common law in the sale of residentialrnprivate-label mortgage-backed securities to the GSEs.</p

According to the suits, “These securities were soldrnpursuant to registration statements, including prospectuses and prospectusrnsupplements that formed part of those registration statements, which contained materiallyrnfalse or misleading statements and omissions. rnDefendants falsely represented that the underlying mortgage loansrncomplied with certain underwriting guidelines and standards including representationsrnthat significantly overstated the ability of the borrowers to repay theirrnmortgage loans.  These representationsrnwere material to the GSEs as reasonable investors, and their falsity violates”rn(multiple) sections of the Securities Act of 1933, portions of the VirginiarnCode and of the District of Columbia Code as well as constituting common lawrnnegligent misrepresentation. Certain complaints also allege state securitiesrnlaw violations.  The suits are similar inrncontent to the complain FHFA filed in July against UBS Americas, Inc.</p

By far the largest suit was filed against JP MorganrnChase & Co, along with 39 current and former executives.  The suit charges that the company sold thernGSEs $33 billion in loans contained in 103 transactions between September 7,rn2005 and September 9, 2007.</p

In addition to JP Morgan/Chase, suits were filedrnagainst the following institutions with many of the suits involving multiplernsubsidiaries and trusts.  Virtually allrnof the transactions occurred between April 2005 and November 2007.</p

Ally Financial Inc.rnfor actions surrounding 21 securitizations sold to the GSEs in the aggregaternamount of $6 billion.  At the time of thernsales Ally was known as GMAC LLC. </p

Bank of America Corporation</spanand 11 of its executives for the sale of 23 securitizations in the amount of $6rnbillion.  </p

Barclays Bank PLC</spanand three of its executives for selling eight pools of mortgage-backed securitiesrnamounting to $4.9 billion</p

Citigroup, Inc</spanand eight of its officers for eight pools of securities it sold totaling $3.5rnbillion.</p

Countrywide Financial Corporation</spanand ten of its executives for 86 securitizations initially valued at $26.6rnbillion.  The current owner ofrnCountrywide, Bank of America Corporation, was named as a party in this suit. </p

Credit Suisse Holdings (USA), Inc</spanand 13 executives for selling $14.1 billion in loans in 43 securitizations. </p

Deutsche Bank AG</spanand three executives for selling 40 securities with an initial value of $14.2rnbillion.</p

First Horizon National Corporation andrnfour executives for selling five securities valued at $883 million. </p

General Electric Company</spanfor selling $549 Million in two securitizations.  Unlike the other plaintiffs General Electric'srninvolvement only covered a period of three months in 2005. </p

Goldman Sachs & Company</spanalong with nine executives is accused of selling $11.1 billion in certificates.rn</p

HSBC North American Holdings, Inc.</spanand five of its officers are being sued for selling $6.2 billion in securities containedrnin 17 pools.</p

Merrill Lynch & Co./First FranklinrnFinancial Corporation and six officials who are accused ofrnunderwriting or sponsored $24.85 billion in 33 securitizations.</p

Morgan Stanley</spanand seven executives involved in the sale of 33 securities with an initialrnvalue of $10.58 billion.</p

Nomura Holding America Inc</spanand five executives alleged to have sold the GSEs seven certificates for $2rnbillion.</p

The Royal Bank of Scotland Group PLC</spanand five officers involved in the sale of $30.4 billion in 68 securitizations. </p

Société Générale</spanand four executives accused of selling $1.3 billion in three certificates.</p

FHFA charges that the originators of the mortgagernloans underlying the securities sold to the GSEs systematically disregardedrntheir underwriting guidelines, especially as regarded the occupancy status ofrnthe mortgaged property, the loan-to-value ratio of the mortgages, and thernability of the borrowers to repay the loan. rnFHFA cites as evidence:</p<ul class="unIndentedList"<liGovernment and private sectorrninvestigations that have confirmed that the originators of the loans failed tornadhere to the stated underwriting guidelines;</li<liThe collapse of the certificates' creditrnratings which further indicates that the loans were not originated in adherencernto those guidelines;</li<liThe surge in mortgage delinquency andrndefaults which further demonstrate that the originators failed to adhere tornthose guidelines.</li</ul

The suit maintains that “The false statements ofrnmaterial facts and omissions of material facts in the Registration Statements,rnincluding the Prospectuses and Prospectus Supplements, directly caused FanniernMae and Freddie Mac to suffer hundreds of millions of dollars in damagesrnincluding, without limitation depreciation in the value of the Certificates.”  The suit further alleges that the underlyingrnmortgage loans experienced defaults and delinquencies at a much higher Rate thanrnthey would have if the loans had been underwritten as described in the RegistrationrnStatements.</p

As an example of the types of carelessness orrnmisrepresentation FHFA is charging in its suit, below are the first five loanrnpackages from each of two tables in the suit against Bank of America.  The first shows the percentage of loans reportedrnin the loan prospectus as having a loan-to-value (LTV) ratio at or under 80rnpercent and the percentage of loans reported to have LTV ratios over 100rnpercent and the true percentage of such loans of each type that a date reviewrnindicated were actually represented in the pool.</p<table border="1" cellpadding="2" cellspacing="0"<tbody<tr<td rowspan="2" valign="top" width="145"

Transaction</p</td<td colspan="2" valign="top" width="258"

%rn Reported with LTV ratio at or under 80%</p</td<td colspan="2" valign="top" width="235"

%rn Reported with LTV Ratio over 100%</p</td</tr<tr<td valign="top" width="132"

Prospectus</p</td<td valign="top" width="126"

Data Review</p</td<td valign="top" width="120"

Prospectus</p</td<td valign="top" width="115"

Data Review</p</td</tr<tr<td valign="top" width="145"

ABFCrn 2005-WMC1</p</td<td valign="top" width="132"

60.68</p</td<td valign="top" width="126"

38.88</p</td<td valign="top" width="120"

0</p</td<td valign="top" width="115"

15.56</p</td</tr<tr<td valign="top" width="145"

ABFCrn 2006-HE1</p</td<td valign="top" width="132"

56.39</p</td<td valign="top" width="126"

38.67</p</td<td valign="top" width="120"

0</p</td<td valign="top" width="115"

18.78</p</td</tr<tr<td valign="top" width="145"

ABFCrn 2006-OPT1-G1</p</td<td valign="top" width="132"

49.60</p</td<td valign="top" width="126"

35.42</p</td<td valign="top" width="120"

0</p</td<td valign="top" width="115"

20.48</p</td</tr<tr<td valign="top" width="145"

ABFCrn 2006-OPT1 – G2</p</td<td valign="top" width="132"

52.53</p</td<td valign="top" width="126"

37.82</p</td<td valign="top" width="120"

0</p</td<td valign="top" width="115"

17.62</p</td</tr<tr<td valign="top" width="145"

ABFCrn 2006-OPT2 – G1</p</td<td valign="top" width="132"

70.79</p</td<td valign="top" width="126"

48.98</p</td<td valign="top" width="120"

0</p</td<td valign="top" width="115"


The second table shows the ratings given by thernthree top rating agencies – Moody’s, S&P, and Fitch on the same loans at therntime the certificates were sold to the GSEs and the ratings given the samerncertificates by the same rating agencies prior to July 31, 2011 after thernagencies downgraded the issues.   In the case of both tables, the information isrnconsistent for all transactions named in the BOA suit.  In fact, while there were some securitizationsrnthat were ranked by only two agencies, none of the three ever gave a ratingrnother than what you see below for every BOA transaction they did review. </p<table border="1" cellpadding="2" cellspacing="0"<tbody<tr<td rowspan="2" valign="top" width="160"


Transaction</p</td<td rowspan="2" valign="top" width="100"


Tranche</p</td<td valign="top" width="198"

Ratings at Issuance</p</td<td valign="top" width="181"

Ratings at July 31, 2011</p</td</tr<tr<td valign="top" width="198"

Moody’s/S&P/Fitch</p</td<td valign="top" width="181"

Moody’s/S&P/Fitch</p</td</tr<tr<td valign="top" width="160"

ABFCrn 2005-WMC 1</p</td<td valign="top" width="100"

A1</p</td<td valign="top" width="198"

Aaa/AAA/AAA</p</td<td valign="top" width="181"

Aaa/AAA/AAA</p</td</tr<tr<td valign="top" width="160"

ABFCrn 2006-HE1</p</td<td valign="top" width="100"

A1</p</td<td valign="top" width="198"

Aaa/AAA/AAA</p</td<td valign="top" width="181"

Caa3/CCC/C</p</td</tr<tr<td rowspan="2" valign="top" width="160"

ABFCrn 2006-OPT1</p</td<td valign="top" width="100"

A2</p</td<td valign="top" width="198"

Aaa/AAA/AAA</p</td<td valign="top" width="181"

Caa1/A/CCC</p</td</tr<tr<td valign="top" width="100"

A1</p</td<td valign="top" width="198"

Aaa/AAA/AAA</p</td<td valign="top" width="181"

Caa1/A/CCC</p</td</tr<tr<td rowspan="2" valign="top" width="160"

ABFCrn 2006-OPT2</p</td<td valign="top" width="100"

A2</p</td<td valign="top" width="198"

Aaa/AAA/AAA</p</td<td valign="top" width="181"

Caa2/BB-/CC</p</td</tr<tr<td valign="top" width="100"

A1</p</td<td valign="top" width="198"

Aaa/AAA/AAA</p</td<td valign="top" width="181"


FHFA filedrnthe complaints under the broad authority granted to it by the Housing andrnEconomic Recovery Act of 2008 and is asking for a jury trial with damages asrndetermined by that trial to include:  </p<ul class="unIndentedList"<liRescissionrnand recovery of the consideration paid for the Certificates with interestrnthereon;</li<liEachrnGSE's monetary losses including any diminution in value of the Certificates asrnwell as lost principal and lost interest payments thereon;</li<liAttorney'srnfees and costs;</li<liPrejudgmentrninterest at the maximum legal rate.</li<liSuchrnother relief as the Court may deem just and proper.</li

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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