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<DIV class=timestamp>September 1, 2011</DIV>
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<H1><NYT_HEADLINE version="1.0" type=" ">U.S. Is Set to Sue a Dozen Big Banks
Over Mortgages</NYT_HEADLINE></H1><NYT_BYLINE>
<H6 class=byline>By <A class=meta-per
title="More Articles by Nelson D. Schwartz"
href="http://topics.nytimes.com/top/reference/timestopics/people/s/nelson_d_schwartz/index.html?inline=nyt-per"
rel=author>NELSON D. SCHWARTZ</A></H6></NYT_BYLINE><NYT_TEXT>
<DIV id=articleBody><NYT_CORRECTION_TOP></NYT_CORRECTION_TOP>
<P>The federal agency that oversees the mortgage giants <A class=meta-org
title="More information about Federal National Mortgage Association Fannie Mae"
href="http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.html?inline=nyt-org">Fannie
Mae</A> and <A class=meta-org title="More information about Freddie Mac"
href="http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org">Freddie
Mac</A> is set to file suits against more than a dozen big banks, accusing them
of misrepresenting the quality of mortgage securities they assembled and sold at
the height of the housing bubble, and seeking billions of dollars in
compensation. </P>
<P>The Federal Housing Finance Agency suits, which are expected to be filed in
the coming days in federal court, are aimed at <A class=meta-org
title="More information about Bank of America Corporation"
href="http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?inline=nyt-org">Bank
of America</A>, JPMorgan Chase, Goldman Sachs and <A class=meta-org
title="More information about Deutsche Bank AG"
href="http://topics.nytimes.com/top/news/business/companies/deutsche_bank_ag/index.html?inline=nyt-org">Deutsche
Bank</A>, among others, according to three individuals briefed on the matter.
</P>
<P>The suits stem from subpoenas the finance agency issued to banks a year ago.
If the case is not filed Friday, they said, it will come Tuesday, shortly before
a deadline expires for the housing agency to file claims. </P>
<P>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. </P>
<P>Fannie and Freddie lost more than $30 billion, in part as a result of the
deals, losses that were borne mostly by taxpayers. </P>
<P>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. </P>
<P>Private holders of mortgage securities are already trying to force the big
banks to buy back tens of billions in soured mortgage-backed bonds, but this
federal effort is a new chapter in a huge legal fight that has alarmed investors
in bank shares. In this case, rather than demanding that the banks buy back the
original loans, the finance agency is seeking reimbursement for losses on the
securities held by Fannie and Freddie. </P>
<P>The impending litigation underscores how almost exactly three years after the
collapse of Lehman Brothers and the beginning of a financial crisis caused in
large part by subprime lending, the legal fallout is mounting. </P>
<P>Besides the angry investors, 50 state attorneys general are in the final
stages of negotiating a settlement to address abuses by the largest mortgage
servicers, including Bank of America, JPMorgan and <A class=meta-org
title="More information about Citigroup Inc"
href="http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org">Citigroup</A>.
The attorneys general, as well as federal officials, are pressing the banks to
pay at least $20 billion in that case, with much of the money earmarked to
reduce mortgages of homeowners facing foreclosure. </P>
<P>And last month, the insurance giant American International Group filed a $10
billion suit against Bank of America, accusing the bank and its Countrywide
Financial and Merrill Lynch units of misrepresenting the quality of mortgages
that backed the securities A.I.G. bought. </P>
<P>Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank
Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we
haven’t seen and hasn’t been filed yet.” </P>
<P>But privately, financial service industry executives argue that the losses on
the mortgage-backed securities were caused by a broader downturn in the economy
and the housing market, not by how the mortgages were originated or packaged
into securities. In addition, they contend that investors like A.I.G. as well as
Fannie and Freddie were sophisticated and knew the securities were not without
risk. </P>
<P>Investors fear that if banks are forced to pay out billions of dollars for
mortgages that later defaulted, it could sap earnings for years and contribute
to further losses across the financial services industry, which has only
recently regained its footing. </P>
<P>Bank officials also counter that further legal attacks on them will only
delay the recovery in the housing market, which remains moribund, hurting the
broader economy. Other experts warned that a series of adverse settlements
costing the banks billions raises other risks, even if suits have legal merit.
</P>
<P>The housing finance agency was created in 2008 and assigned to oversee the
hemorrhaging government-backed mortgage companies, a process known as
conservatorship. </P>
<P>“While I believe that F.H.F.A. is acting responsibly in its role as
conservator, I am afraid that we risk pushing these guys off of a cliff and
we’re going to have to bail out the banks again,” said Tim Rood, who worked at
Fannie Mae until 2006 and is now a partner at the Collingwood Group, which
advises banks and servicers on housing-related issues. </P>
<P>The suits are being filed now because regulators are concerned that it will
be much harder to make claims after a three-year statute of limitations expires
on Wednesday, the third anniversary of the federal takeover of Fannie Mae and
Freddie Mac. </P>
<P>While the banks put together tens of billions of dollars in mortgage
securities backed by risky loans, the Federal Housing Finance Agency is not
seeking the total amount in compensation because some of the mortgages are still
good and the investments still carry some value. In the UBS suit, the agency
said it owned $4.5 billion worth of mortgages, with losses totaling $900
million. Negotiations between the agency and UBS have yielded little progress.
</P>
<P>The two mortgage giants acquired the securities in the years before the
housing market collapsed as they expanded rapidly and looked for new investments
that were seemingly safe. At issue in this case are so-called private-label
securities that were backed by subprime and other risky loans but were rated as
safe AAA investments by the ratings agencies. </P>
<P>In the years before 2007, “the market was so frothy then it was hard to find
good quality loans to securitize and hold in your portfolio,” said David Felt, a
lawyer who served as deputy general counsel of the finance agency until January
2010. “Fannie and Freddie thought they were taking AAA tranches, and like so
many investors, they were surprised when they didn’t turn out to be such quality
investments." </P>
<P>Fannie and Freddie had other reasons to buy the securities, Mr. Rood added.
For starters, they carried higher yields at a time when the two mortgage giants
could buy them using money borrowed at rock-bottom rates, thanks to the implicit
federal guarantee they enjoyed. </P>
<P>In addition, by law Fannie and Freddie were required to back loans to
low-to-moderate income and minority borrowers, and the private-label securities
were counted toward those goals. </P>
<P>“Competitive pressures and onerous housing goals compelled them to operate
more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.
</P>
<P>In fact, Freddie was warned by regulators in 2006 that its purchases of
subprime securities had outpaced its risk management abilities, but the company
continued to load up on debt that ultimately soured. </P>
<P>As of June 30, Freddie Mac holds more than $80 billion in mortgage securities
backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A
loans. Freddie estimates its total gross losses stand at roughly $19 billion.
Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans,
with losses standing at nearly $14 billion. </P></DIV></FONT></DIV>
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<DIV><FONT size=2 face=Verdana>_________________________________</FONT></DIV>
<DIV><FONT size=2 face=Verdana>Wayne A. Fox<BR><A
title="mailto:wayne.a.fox@gmail.com
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