(9/7/2011) - The same type of toxic mortgage securities recently awarded
a questionable Triple-A rating are at the bottom of federal suits that
allege 17 financial institutions illegally packaged mortgage securities they
sold to the federal government.
Too-big-to-fail institutions ought to be busted for breaking the law, but
the suits' critics say the effort could throw another monkey wrench in the
already malfunctioning mortgage lending machine.
A large settlement for damages could siphon capital from the flailing
banking system and force banks to further squeeze credit, forcing even more
consumers out of the housing market, according to critics.
The Federal Housing Finance Agency (FHFA), the conservator for Fannie Mae
and Freddie Mac, last week filed the suits against Bank of America, Citigroup,
Countrywide, JP Morgan Chase, as well as some international banks, including
Credit Suisse Holdings and Deutsche Bank, among others in the U.S. and
abroad.
The suits seek unspecified damages, not equal to, but based on the $200
billion in mortgage-backed securities Fannie Mae and Freddie Mac bought --
or were hoodwinked into buying -- during the housing bubble.
FHFA, responding to unfavorable media coverage, said Sept. 6 in a prepared statement, anti-regulatory rogues don't run the
government. The kind of bank behavior that warranted the FHFA suits is the
same kind of behavior that set the economy on a collision course with
disaster.
"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," the statement says.
Regulators get some of the blame for not acting sooner. The failure to
enforce federal
regulations also helped plunge the economy into the worst recession
since the Great Depression.
The FHFA complaints seek damages and civil penalties under the Securities
Act of 1933, and is similar to the FHFA complaint filed against UBS
Americas, Inc. on July 27, 2011.
In addition, each complaint seeks compensatory damages for negligent
misrepresentation. Other complaints also allege state securities law
violations or common law fraud.
According to the suits, specific charges are based on banks packaging
securities with mortgages that:
• Didn't adhere to underwriting guidelines designed to access the
creditworthiness of the borrower, the ability of the borrower to repay the
loan and the adequacy of the mortgage property as security for the loan.
• Didn't accurately state the occupancy status of the borrower, as
primary resident, second home owner or investment property owner.
• Didn't come with an accurate loan-to value-ratio. Inflated
appraisals can understate the credit risk associated with a loan.
• Were packaged as securities with suspect credit ratings.
Since the housing market crash, toxic mortgage securities have
been the object of suits brought by both private investors and states'
attorneys general. The Bank of America recently agreed to an $8.5 billion
settlement for a group of high-profile investors who lost money on
money-losing mortgage-backed securities purchased before the U.S. housing
collapse.
Yet, in late August, rating agency Standard & Poors
gave a higher rating to securities backed by subprime home loans, the same
type of investments that led to the worst financial crisis since the Great
Depression, than it assigned a month early to the U.S. government.
Just before the FHFA suit, among other bank shenanigans under the
microscope, robo signing has been discovered as far back as
1990.
Murky and getting murkier.
Bottom line? Honest, transparent leadership in the banking sector is
missing and no where in sight.
To the suits' critics: If federal regulators don't step up, who will?
