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FHFA Looks to Reduce GSE Liability For Losses on Private Label MBS Investments

by devteam July 13th, 2010 | Share

The Federal Housing Finance Agency (FHFA) has issuedrnsubpoenas to 64 companies seeking loan documents and other information relatedrnto private-label mortgage-backed securities (PLS).  The PLS are those that the two governmentrnsponsored enterprises (GSEs) Freddie Mac and Fannie Mae invested in during thernhousing boom.</p

FHFA refused to divulge the identities of the parties tornwhom the subpoenas have been addressed, beyond saying that they were directed tornthe trustees and servicers controlling or holding the documentation.  The purpose was to obtain loan files andrnother transaction documents pertaining to the PLS in order to analyze them andrndetermine whether losses sustained by the GSEs from their investments arern”the legal responsibilities of others.”  </p

The subpoenas target only those documents related to the PLSrnthat the Conservator “currently intends to examine, which are not all ofrnthe PLS owned by the Enterprise.” rnFHFA, however, did not rule out additional subpoenas in the future,rnsaying that would be determined by developments in connection with the currentrnset.</p

Plain and Simple: the FHFA is trying to determine if they can force somern lenders to cover GSE losses on certain private label MBS investments. </p

The agency said that Freddie and Fannie have been workingrnfor many months to obtain the documents underlying the PLS to determine if theyrnmet required standards and to assess many claims arising from the failure ofrnthe loans or their servicing to meet those standards.  “Specifically,” the press releasernstates, “the Enterprises have attempted to determine whether misrepresentations,rnbreaches of warranties or other acts or omissions by PLS counterparties wouldrnrequire repurchase of loans underlying the PLS by the counterparties and whetherrnother remedies might be appropriate.”  “Difficulty in obtaining the loanrndocuments has presented a challenge to the Enterprises' efforts” so FHFArnis issuing the subpoenas </p

FHFA was given subpoena powers by Congress under the Housingrnand Economic Recovery Act of 2008.  If arncompany under subpoena refuses to supply the requested documents, an FHFArnspokesman said that the agency would examine its legal options and that, asrnConservator of the GSEs, FHFA also has broad enforcement powers.</p

The agency said it would be premature to speculate as to whetherrnthe Conservator will bring lawsuits once it has obtained the subpoenaed documentsrnbecause they must first be inventoried, classified, and analyzed. While it isrnnot known how many documents might be involved, the Conservator said thernnumbers could be “significant.”</p

Acting FHFA Director Edward Demarco said that his agency wasrntaking the action “consistent with our responsibilities as Conservator ofrneach Enterprise.  By obtaining theserndocuments we can assess whether contractual violations or other breaches have takenrnplace leading to losses for the Enterprises and thus taxpayers.  If so, we will then make decisions regardingrnappropriate actions.”</p

Through the first quarter of 2010 GSE buyback requests were up 60 percent vs. Q1 2009.  Based upon developments in connection with information obtained with these subpoenas, other subpoenas may be issued.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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