The US Federal Housing Finance Agency (FHFA) is suing 17 financial companies – including Goldman Sachs, the Bank of America, JP Morgan Chase & Co, and Citigroup along with EU banks such as Barclays, Credit Suisse and the Royal Bank of Scotland – on the basis they exaggerated the value of mortgage packages sold totaling over $195 billion.
The FHFA, which keeps tabs on the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), launched legal action on behalf of the two agencies, claiming that banks breached securities law and neglected to properly verify mortgagers’ reported earnings in sales of amalgamated mortgages as securities to investors.
Freddie Mac and Fannie Mae incurred losses in excess of $30 billion when the housing market crashed in 2008. The two agencies purchase loans and securities on mortgages to boost credit for house purchases.
The proceedings come after Fannie Mae and Freddie Mac’s lawsuit against investment bank Swiss Bank UBS in July. The agencies claimed UBS defrauded them of $900 million during the housing boom. UBS allegedly misrepresented the $4.5 billion of mortgage debt it sold to the housing agencies.
In another lawsuit, insurer American International Group sued Bank of America in July to get back $10 billion it lost after investing $28 billion on mortgage debt that the bank supposedly misrepresented as safer than it was.
Lawsuit Announcement Slashes Banking Stocks
The FHFA legal proceedings put Bank of America, in particular, at serious risk. Having acquired Countrywide Financial Corp and Merrill Lynch, proceedings against the three combined reach close to $58 billion. The government agency is suing JP Morgan Chase and the Royal Bank of Scotland for the sale of mortgage-backed securities worth $33 billion and just over $30 billion respectively.
Bank of America stocks plummeted more than 8% following the announced lawsuits. JP Morgan Chase fell more than 4.5%, Citigroup over 5%, Goldman Sachs 4.5% and Morgan Stanley over 5.5%.
Big banks are being made to feel the sting of accountability after huge losses following the housing market crash. Seizure of government-sponsored enterprises in 2008 has reportedly left taxpayers to foot a bill of over $135 billion. However, some argue that investors were aware of the risks involved in investing in securities.
Should the lawsuits see banks fork out compensation, the heavy losses could compound the financial sector’s problems and impede its recovery. It could also give rise to copycat lawsuits leading to even greater damage.
Financial sector losses could equally have an adverse affect on the already struggling housing market and see a domino affect in the US economy as it fights to regain its footing.
Key Statistics – US Mortgage Market Statistics (source: Federal Housing Finance Agency)
- The National Average Contract Mortgage Rate for the Purchase of Previously Occupied Homes by Combined Lenders saw a month-on-month decrease to less than 4.58%.
- Interest rates on 30-year fixed-rate mortgages of $417,000 or under fell to just below 4.7% in July.
- House prices fell over 0.5% in the second quarter of 2011 on the preceding quarter.
- House purchases in 25 of the most densely populated city areas across the US fell most steeply in Atlanta-Sandy Springs-Marietta in Georgia where prices fell just less than 15% based on four accumulative quarters.
- House prices in Pittsburgh, Pennsylvania, increased more than 3.5% in the same period.