The New York Times is reporting that the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, is planning to sue more than a dozen big banks for misrepresenting the quality of mortgages that were sold at the height of the housing boom. The suit alleges that the banks who packaged and sold the mortgages to Fannie and Freddie, failed to exercise proper due diligence to insure that the mortgages were of the quality that was represented in the securities market.
Fannie and Freddie have lost billions of dollars due to bad mortgages, and the taxpayers have had to pick up the tab for those losses. This lawsuit will truly be a “clash of the titans” since it places the world’s largest housing finance agencies, against many of the world’s largest banks. Included in the suit will be Bank of America, and Germany’s Deutsche bank. UBS has already been sued by the FHFA back in July, as part of it’s ongoing investigation into the mortgage crisis.
The banks are already facing lawsuits from private investors and other entities, such as A.I.G. who has already brought a 10 billion dollar suit against Bank of America for it’s Countrywide mortgage unit. Countrywide was the largest mortgage company in the United States during the housing boom, and was bought by Bank of America in early 2008 when Countrywide was close to failure as the housing market crisis began to develop in earnest.
Since the housing market melt-down, millions of mortgages that may have been good to begin with have now turned toxic, as the high foreclosure rate has dragged down the value of the vast majority of residential real estate in the U.S. Homeowners who had good credit and income at the time the mortgage was taken, have watched as their property values have been eroded by 30% on average, leaving many of them “under-water” owing more than the property is now worth.
Many who were employed when their loan was processed have become victims of the high unemployment rate that was largely triggered by the collapse of the housing market. The domino effect has been pronounced, with high unemployment and record foreclosures still dogging the housing sector.
Since there are viable legal arguments on both sides, it is very difficult at this point to predict how this case will go, but one thing is for sure, the big banks are now being surrounded on all sides by parties trying to recover many billions of dollars in losses from toxic mortgage backed securities. Some fear that these suits could push the big banks to the brink of failure, and in so doing, force another taxpayer funded bailout.
That would be an interesting scenario, as the U.S. taxpayers are still angry over the original bailout. I doubt congress and a weakened Obama Administration would have the political stomach for such actions, given that the original bailout has done little to help the ailing U.S. economy.