The New York Times reports that our government is going to file suit against a bunch of major banks, alleging fraud in the mortgage securitization process. Apparently, the statute of limitations expires in a few days, so the Federal Housing Finance Agency is expected to slip the suit in just under the wire.
The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers' incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.
In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.
The details are rather sketchy, and I am not a securities lawyer, but I expect that this is going to be a fairly difficult case to make. Fannie and Freddie already have the right to force banks to take back loans with obvious underwriting flaws, or that go bad too quickly, and my understanding is that they've been doing just that.
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