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

The Federal Housing Finance Agency (FHFA) has issued subpoenas to 64 companies seeking loan documents and other information related to private-label mortgage-backed securities (PLS).  The PLS are those that the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae invested in during the housing boom.

FHFA refused to divulge the identities of the parties to whom the subpoenas have been addressed, beyond saying that they were directed to the trustees and servicers controlling or holding the documentation.  The purpose was to obtain loan files and other transaction documents pertaining to the PLS in order to analyze them and determine whether losses sustained by the GSEs from their investments are "the legal responsibilities of others." 

The subpoenas target only those documents related to the PLS that the Conservator "currently intends to examine, which are not all of the PLS owned by the Enterprise."  FHFA, however, did not rule out additional subpoenas in the future, saying that would be determined by developments in connection with the current set.

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

The agency said that Freddie and Fannie have been working for many months to obtain the documents underlying the PLS to determine if they met required standards and to assess many claims arising from the failure of the loans or their servicing to meet those standards.  "Specifically," the press release states, "the Enterprises have attempted to determine whether misrepresentations, breaches of warranties or other acts or omissions by PLS counterparties would require repurchase of loans underlying the PLS by the counterparties and whether other remedies might be appropriate."  "Difficulty in obtaining the loan documents has presented a challenge to the Enterprises' efforts" so FHFA is issuing the subpoenas

FHFA was given subpoena powers by Congress under the Housing and Economic Recovery Act of 2008.  If a company under subpoena refuses to supply the requested documents, an FHFA spokesman said that the agency would examine its legal options and that, as Conservator of the GSEs, FHFA also has broad enforcement powers.

The agency said it would be premature to speculate as to whether the Conservator will bring lawsuits once it has obtained the subpoenaed documents because they must first be inventoried, classified, and analyzed. While it is not known how many documents might be involved, the Conservator said the numbers could be "significant."

Acting FHFA Director Edward Demarco said that his agency was taking the action "consistent with our responsibilities as Conservator of each Enterprise.  By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the Enterprises and thus taxpayers.  If so, we will then make decisions regarding appropriate actions."

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.