BANKS SUED OVER MORTAGE DEALS / THE FINANCIAL TIMES( A MUST READ )

Last updated: September 3, 2011 12:08 am

Banks sued over mortgage deals

By Tom Braithwaite, Kara Scannell and Dan McCrum in New York


A US regulator sued 17 international financial groups, ranging from Bank of America to Barclays, alleging they mis-sold almost $200bn of mortgage-backed securities and demanding compensation for billions of dollars of losses.


The Federal Housing Finance Agency filed the suits in New York state Supreme Court on Friday accusing the banks of making “materially false” statements about the quality of mortgages that were bundled into securities and sold, before plunging in value in the financial crisis.


Bank stocks fell sharply on Friday in anticipation of the lawsuits – the latest salvo in a barrage of mortgage-related litigation that has rocked investor confidence in the sector.


Bank of America, the biggest seller of mortgage-backed securities to Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy and guarantee US home loans, fell 8 per cent. The FHFA is suing the banks in its capacity as regulator of Fannie and Freddie.


But the targets of the lawsuits include other US banks such as Goldman Sachs, Morgan Stanley, JPMorgan Chase and Citigroup as well as overseas institutions such as Nomura and Credit Suisse. Individual employees are also cited in the court filings for signing documents that the FHFA said were false.


Since Fannie and Freddie are in government conservatorship and Royal Bank of Scotland, another target of the action, is majority-owned by the UK government, the lawsuits have produced the unusual situation of Washington suing London over crisis-era losses on $30.4bn of securities.


Banks reacted angrily to the move. BofA said Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities” and yet were “now seeking to hold other market participants responsible for their losses”. Deutsche Bank said the institutions were “the epitome of a sophisticated investor” and the bank would “vigorously defend against the action”.


Dick Bove, banking analyst for Rochdale Securities, questioned the suit, arguing that the “forensic analysis of the mortgages” now proposed should have been part of Fannie and Freddie’s underwriting when they bought the mortgage securities.


He also expected negative consequences for the economy. “They are taking measures that will significantly increase unemployment,” he said, arguing that the suit further increases pressure on the banks to shrink, by reducing their lending activity and raising capital. He suggested that the Securities and Exchange Commission should investigate what appeared to be “a well orchestrated campaign to drive BofA out of business”.


The latest legal moves will be celebrated by those who believe that banks have gone unpunished for their part in manufacturing the so-called toxic assets out of subprime mortgage securities that clogged the financial system during the credit crisis.


Wells Fargo was a notable absentee from the list, which also included HSBC, Société Generale, General Electric, Ally Financial and First Horizon. Wells declined to comment but another institution said all banks had been in discussions with regulators with a view to settling the legal action and such deals might still be reached in the coming weeks.


FHFA has employed Quinn Emanuel Urquhart & Sullivan, whose website quotes a client describing its lawyers as “hungry dogs”, to pursue damages. The firm carved out a niche in mortgage litigation by choosing to represent buyers or insurers of the debt instead of the more lucrative business of representing banks and mortgage origination companies.


Additional reporting by Cardiff Garcia and John McDermott in New York


Copyright The Financial Times Limited 2011