On September 2, 2011, the Federal Housing Finance Agency (FHFA) filed a series of lawsuits against seventeen (17) of the biggest lenders in the country (along with some individuals, including top officers in the banks) for allegedly misleading Fannie Mae and Freddie Mac about residential mortgage-backed securities that these banks sold to Fannie Mae and Freddie Mac. (For details on how these banks were bundling and selling mortgages, read our series explaining the guts of Foreclosure Fraud).
Specifically, the federal government has sued these banks (and bankers) allegedly that they have (1) violated state and federal securities laws as well as (2) allegedly committing state intentional torts like fraud and negligent misrepresentation. Tort law brings with it the possibility of compensatory (i.e., punitive) damages — which means these claims could end up in the billions and billions of dollars.
What Is Going On? The Basics.
1. Who are Fannie Mae and Freddie Mac and the FHFA?
The Federal National Mortgage Association (FNMA or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”) are two programs that are currently under the control and oversight of FHFA.
- Freddie Mac was created by the federal government in 1970 specifically to expand the secondary market for mortgages in the U.S. and its job was to buy mortgages on the secondary market, bundle them together, and sell the bundles as a single mortgage-backed security to investors on the open market. Freddie Mac was supposed to increase the amount of money for loans to those who wanted to buy a home – in other words, a way for the federal government to help citizens get the American Dream of Homeownership.
- Fannie Mae was also created by the federal government, but it has been around for a lot longer than Freddie Mac. Fannie Mae began as part of FDR’s New Deal back in 1938, initially as a government-sponsored enterprise and later as a publicly traded company (its shares have been for sale since 1968). Fannie Mae was created to boost the secondary mortgage market (those same bundles of mortgages) by offering its own mortgage-backed securities with the idea that this would help mortgage lenders to put their money back into more home loans. Again, Fannie Mae was there to help people realize the American Dream.
- The Federal Housing Finance Agency (FHFA) was created by Congress in 2008 as an independent federal agency that took over the duties of several parts of the U.S. Department of Housing and Urban Development as well as getting its own, new regulatory powers to deal with the growing economic crisis, including having the power to take control of government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
On September 7, 2008, the Federal Housing Finance Agency (FHFA), which has just filed all these lawsuits against the banks, took over Fannie Mae and Freddie Mac, putting both of them under the oversight of FHFA. When FHFA took over of Fannie Mae and Freddie Mac some observers said “…it was one of the most sweeping government interventions in private financial markets in decades.” Officially, FHFA became the “conservator” of both Fannie Mae and Freddie Mac.
2. How Were Freddie Mac and Fannie Mae Involved With These 17 Banks?
The reason that Fannie Mae and Freddie Mac existed was to help build the financial availability of home loans to more Americans. In 1992, Congress created “affordable housing” quotas that had the two government enterprises buying mortgages from banks that had been made to people who were near the median income level of their part of the country. Fannie and Freddie bought mortgage-backed securities based on subprime loans from lenders, and over time, they were buying more of these bundles of subprime mortgage-backed securities than anyone else. When the subprime loans began defaulting, Fannie and Freddie were crippled.
3. What Does the Lawsuit Do?
As the conservator for Fannie Mae and Freddie Mac, the FHFA is suing for damages sustained by Fannie Mae and Freddie Mac from these purchases of mortgage backed securities. For example, FHFA is suing Bank of America for billions in damages, alleging that Fannie Mae and Freddie Mac purchased over $57 billion in mortgage securities from Bank of America directly, as well as from two entities that Bank of America bought (and is now responsible for), Merrill Lynch and Countrywide Financial. FHFA argues that here, like in its other suits, Bank of America failed to perform the due diligence required under federal and state securities law; point being, that if Bank of America had done proper due diligence, or any due diligence, before selling those bundles, it would have discovered things like that the bundles contained loans where the individual borrower’s income was either non-verified and/or inflated. (Inflated income is a basis for a predatory lending claim, which homeowners are using as a defense/counter-claim to mortgage foreclosure. For more information or to ask questions related to predatory lending and mortgage foreclosure counter-claims, please feel free to read our web page titled: Predatory Lending – Bank Fraud and Lender Negligence)
Due to the banks failure to perform proper due diligence, the FHFA argues, Fannie Mae and Freddie Mac bought bad mortgage paper, and were hurt and damaged when the borrowers were unable to pay their mortgage notes. So now, FHFA is suing both for the actual damages as well as for tort (or compensatory) damages, to boot. This is yet another example of a party claiming that the banks did their job poorly or not at all to the detriment of others.