FHFA Seeks to Amend Press Coverage of Lawsuits

ThernFederal Home Financing Agency (FHFA), apparently stung by the coverage of its lawsuitsrnit against 17 banks and a number of their executive officers, has issued arnclarification of the goals and rational behind those suits.  The suits which were filed last Friday seekrndamages on behalf of Freddie Mac and Fannie Mae (the GSEs) for losses arisingrnout of their purchase of dozens of private label securities (PLS) backed byrnresidential mortgages which were issued by the 17 banks.</p

The agencyrnreiterated its stated purpose in filing the suits:  “As conservator of Fannie Mae and FreddiernMac, FHFA is charged with preserving and conserving these companies’ assets andrndoes so on behalf of taxpayers. The complaints filed today reflect FHFA’srnconclusion that some portion of the losses that Fannie Mae and Freddie Macrnincurred on private-label mortgage-backed securities (PLS) are attributable tornmisrepresentations and other improper actions by the firms and individualsrnnamed in these filings. Based on our review, FHFA alleges that the loans hadrndifferent and more risky characteristics than the descriptions contained in thernmarketing and sales materials provided to the Enterprises for those securities.”</p

Prior tornthe conservatorship, the press release says, each GSE bought hundreds ofrnbillions of PLS packaged by large financial institutions.  “To be clear, Fannie Mae and Freddie Mac wererninvestors in these PLS not the originators of those securities.”  These PLS were often part of larger pools andrnthe PLS sold to the GSEs were often customized to meet their requirements forrnconforming mortgages.  The GSEs, likernother investors, did not have access to the underlying mortgages and so reliedrnon the marketing and sales material to accurately describe the loans.</p

“At thernheart of the suits is FHFA’s conclusion that the actual mortgages backing manyrnof the securities had characteristics that differed in a material way from whatrnhad been represented in securities filings.” rnFHFA said that regardless of the size or sophistication of thernpurchaser, the seller has a legal responsibility to accurately represent therncharacteristics of the PLS collateral. rnThe agency said it has consistently made clear its intention to seekrnrecoveries on losses that are the legal responsibility of others, but otherrnremedies have failed and it is now taking action to fulfill itsrnresponsibilities as conservator.  Thernagency said it has not filed suit against every issuer of PLS nor on every PLSrnpurchased by the GSEs; only those where it believes it has substantial evidencernof violations. </p

FHFA criticizedrnpress reports that claimed it is seeking “nearly $200 billion in damages” orrnstating that the recoveries sought are excessive.  Any attempt to place a dollar figure onrnpotential recoveries on the basis of securities purchased, outstandingrnprincipal balances, or losses incurred is “premature and potentially misleading.  Actualrnrecoveries will be determined based on filings by the parties, evidence andrnjudicial findings.”</p

FEMA also disputed editorial claims that the suits will disrupt economicrnrecovery, endanger the banks, or increase their cost of capital.  The long term stability and resilience of thernfinancial system, it said, depends on investors being able to trust that thernsecurities they are offered adhere to the law. </p

Lastly,rnthe agency said there is no connection between its suits and the ongoingrninvestigations by the state’s attorneys general.  Those, it said, are focusing on the servicingrnof loans, particularly as related to foreclosure processes.  While some of the same loans may be involvedrnin both actions, they are quite different matters.  “Each is a valid but separate concern,rnleading to separate and distinct claims for recompense.”  </p

Read the FHFA’s Full Response Here.

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