Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. were among the 17 lenders sued by the Federal Housing Finance Agency for allegedly misleading Fannie Mae and Freddie Mac about billions of dollars of residential mortgage-backed securities.
In lawsuits filed today in New York state and federal courts and in federal court in Connecticut, the agency also named as defendants Barclays Plc, Nomura Holdings Ltd., HSBC Holdings Plc Societe General SA, Morgan Stanley, Ally Financial, Royal Bank of Scotland, Credit Suisse Group AG, Deutsche Bank AG and First Horizon National Corp.
The complaints say the banks misled Fannie Mae and Freddie Mac about the soundness of the underlying mortgages. FHFA is seeking to have some defendants refund the investments with interest and pay other damages, including punitive damages for alleged misconduct.
“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,” the FHFA said in a statement.
Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.
Billions in Securities
The agency said in its filings that Fannie Mae and Freddie Mac bought $6 billion in mortgage-backed securities from Bank of America; $24.8 billion from Merrill Lynch, which Bank of America took over in 2008; $3.5 billion from Citigroup; $11.1 billion from Goldman Sachs and $4.9 billion from Barclays. The suits also cover $2 billion in securities from Nomura, $33 billion from JPMorgan, $883 million from First Horizon, $14.2 billion from Deutsche Bank, $14.1 billion from Credit Suisse, $1.3 billion from Societe Generale and $6.2 billion from HSBC.
“The claims brought by the FHFA are unfounded,” said Frank Kelly, a spokesman for Frankfurt-based Deutsche Bank. “Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more, often after hand-picking the loans they now claim should not have been included in the offerings.”
The FHFA sued UBS AG, Switzerland’s biggest bank, in July over $4.5 billion in residential mortgage-backed securities sold to Fannie Mae and Freddie Mac, claiming they misstated the risks of the investments. The suit seeks unspecified damages.
The government-sponsored enterprises already “acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors,” said Larry DiRita, a spokesman for Charlotte, North Carolina-based Bank of America.
The firms claimed to understand the risks, and continued buying, even after their regulator said they lacked adequate risk-management capabilities to do so, DiRita said. “Despite this, the GSEs are now seeking to hold other market participants responsible for their losses.”
Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment on today’s filing, as did Kerrie Cohen, a spokeswoman for London-based Barclays, and Kristin Lemkau, a spokeswoman for JPMorgan in New York.
Mark Lake of New York-based Morgan Stanley, Jonathan Hodgkinson of Tokyo-based Nomura, Michael DuVally, of Goldman Sachs in New York, Steven Vames, of Zurich-based Credit Suisse, also declined to comment. Neil Brazil, a spokesman for London-based HSBC, declined to comment.
Gina Proia, a spokeswoman for Detroit-based Ally Financial Inc., declined to comment before the firm had a chance to read the filing. Pholida Phengsomphone, a spokeswoman for Edinburgh-based Royal Bank of Scotland, declined to comment.