Money Matters - Simplified

FHFA to sue banks over flawed mortgages

Separately, private investors are demanding banks to buy back ten of billions of tainted bonds sold at the height of housing bubble, as they know that if banks lose the legal battle, it would adversely affect earnings for years.

The Federal Housing Finance Agency (FHFA) is preparing to drag more than dozen of banks to court over mortgage-backed securities.

Alleging that banks, including Bank of America, JPMorgan Chase, Goldman Sachs, and Deutsche Bank misrepresented quality of mortgage securities in years preceding financial crisis, the regulatory agency is seeking billions of dollars in compensation to recover huge loss incurred from shoddy investment.

As the deadline for FHFA to sue banks is expiring soon, the housing agency is likely to file lawsuit in federal court Friday or Tuesday, as Monday is a holiday.

FHFA, which oversees Fannie Mae and Freddie Mac, will argue that banks “failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified,” according to The New York Times.

Fannie Mae and Freddie Mac lost $30 billion when the housing bubble burst.

Though banks haven't commented on the lawsuit, financial service industry executives claim that losses on mortgages were the result of overall economic downturn, and not how they were packed into securities and sold, according to the Times.

Other lawsuits against banks
The current $30 billion lawsuit, which might turn out to be the worst mortgage related battles, is not the first against banks for failed investments.

In July, FHFA sued UBS AG for $900 million, accusing the bank of misrepresenting quality of 16 mortgage-backed securities sold between 2005 and 2007.

Also, earlier last month, American International Group Inc. sued Bank of America for more than $10 billion on loss on failed investments worth $28 billion.

Separately, private investors are demanding banks to buy back ten of billions of tainted bonds sold at the height of housing bubble, as they know that if banks lose the legal battle, it would adversely affect earnings for years.

Industry executives deny claims
Though banks haven't commented on the lawsuit, financial service industry executives claim that losses on mortgages were the result of overall economic downturn, and not how they were packed into securities and sold, according to the Times.

They added that firms like A.I.G. as well as Fannie and Freddie were aware that the securities were not risk free.

Nonetheless, the lawsuit will adversely affect the banks, leading to fall in share prices.