by Broderick Perkins
(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.
(See the Washington Post's "Perp Walk.")
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?
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