FHFA Seeks to Amend Press Coverage of Lawsuits

The Federal Home Financing Agency (FHFA), apparently stung by the coverage of its lawsuits it against 17 banks and a number of their executive officers, has issued a clarification of the goals and rational behind those suits.  The suits which were filed last Friday seek damages on behalf of Freddie Mac and Fannie Mae (the GSEs) for losses arising out of their purchase of dozens of private label securities (PLS) backed by residential mortgages which were issued by the 17 banks.

The agency reiterated its stated purpose in filing the suits:  "As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and conserving these companies' assets and does so on behalf of taxpayers. The complaints filed today reflect FHFA's conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings. Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities."

Prior to the conservatorship, the press release says, each GSE bought hundreds of billions of PLS packaged by large financial institutions.  "To be clear, Fannie Mae and Freddie Mac were investors in these PLS not the originators of those securities."  These PLS were often part of larger pools and the PLS sold to the GSEs were often customized to meet their requirements for conforming mortgages.  The GSEs, like other investors, did not have access to the underlying mortgages and so relied on the marketing and sales material to accurately describe the loans.

"At the heart of the suits is FHFA's conclusion that the actual mortgages backing many of the securities had characteristics that differed in a material way from what had been represented in securities filings."  FHFA said that regardless of the size or sophistication of the purchaser, the seller has a legal responsibility to accurately represent the characteristics of the PLS collateral.  The agency said it has consistently made clear its intention to seek recoveries on losses that are the legal responsibility of others, but other remedies have failed and it is now taking action to fulfill its responsibilities as conservator.  The agency said it has not filed suit against every issuer of PLS nor on every PLS purchased by the GSEs; only those where it believes it has substantial evidence of violations.

FHFA criticized press reports that claimed it is seeking "nearly $200 billion in damages" or stating that the recoveries sought are excessive.  Any attempt to place a dollar figure on potential recoveries on the basis of securities purchased, outstanding principal balances, or losses incurred is "premature and potentially misleading.  Actual recoveries will be determined based on filings by the parties, evidence and judicial findings."

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

Lastly, the agency said there is no connection between its suits and the ongoing investigations by the state's attorneys general.  Those, it said, are focusing on the servicing of loans, particularly as related to foreclosure processes.  While some of the same loans may be involved in both actions, they are quite different matters.  "Each is a valid but separate concern, leading to separate and distinct claims for recompense." 

Read the FHFA's Full Response Here.