Federal Housing Finance Agency sues 17 banks over mortgage bonds

In the latest government effort to recoup mortgage meltdown losses, the federal regulator for Fannie Mae and Freddie Mac sued 17 banks over mortgage bonds that were sold to the giant home-finance companies during the housing boom and proved to be toxic.

The lawsuits, filed late Friday in New York federal and state courts and Connecticut federal court, for the most part accused the banks of negligence in misrepresenting the risks embedded in securities backed by subprime mortgages and other risky loans. Some of the lawsuits, filed by the Federal Housing Finance Agency, also alleged fraud against some of the banks.

The damage demands, which were not disclosed, could run well into the billions of dollars against the banking giants named in the lawsuits. A similar suit filed by the agency in July sought to recoup losses of more than $900 million from dealings with Swiss banking giant UBS.

Shares of major U.S. banks named as defendants in the litigation tumbled Friday. Bank of America Corp. dropped 8%, Citigroup Inc. and Goldman Sachs Group Inc. fell more than 5%, and JPMorgan Chase & Co. declined more than 4%.

Several defendants couldn’t be reached or declined to comment, while others said they would aggressively defend themselves, characterizing Fannie Mae and Freddie Mac as sophisticated investors that knowingly took on risk. They said the losses stemmed from market forces, not their errors and omissions.

Fannie and Freddie “have in their past public statements acknowledged that their losses in the mortgage-backed securities market were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment,� Bank of America said in a statement.

The lawsuits illustrate how federal authorities, largely stymied in attempts to mount criminal prosecutions related to the mortgage crisis, are targeting Wall Street in civil lawsuits.

The National Credit Union Administration has said it plans to sue as many as 10 banks that sold money-losing mortgage bonds to credit unions, with JPMorgan, the Royal Bank of Scotland and Goldman Sachs named defendants so far. The banks have denied wrongdoing.

The Federal Deposit Insurance Corp. also has filed dozens of lawsuits accusing bankers and various others of causing the collapse of federally insured institutions, including IndyMac Bank in Pasadena and Washington Mutual Bank in Seattle.

The Federal Housing Finance Agency took control of Fannie Mae and Freddie Mac nearly three years ago as they skidded toward bankruptcy. Propping them up to keep the housing markets from collapse has cost taxpayers about $169 billion so far.

Fannie and Freddie, which own or guarantee 65% of all U.S. mortgages and issue mortgage-backed bonds sold around the world, were barred from making significant direct investments in subprime loans. But they backed large numbers of loans made to borrowers with decent credit scores who didn’t document their incomes.

The bonds at issue in the lawsuits are so-called private-label securities, issued by lenders and Wall Street firms instead of Fannie and Freddie. While backed by risky loans, they were supposed to have been the safest of the bonds carved out of privately pooled mortgages. Fannie and Freddie were allowed to buy many of them to help satisfy requirements that they support lending to low- and moderate-income borrowers.

But when huge numbers of loans went into default and the housing markets began falling apart in 2007, the supposed safeguards built into the structures of the securities proved inadequate and they suffered huge losses.

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