BofA Seeks to Dismiss FHFA Suit Over Mortgage Securities

Bank of America Corp.’s Countrywide Financial unit asked a judge to throw out claims for “billions of dollars” in damages by the Federal Housing Finance Agency for mortgage-backed securities bought by Freddie Mac and Fannie Mae.

The agency’s federal and state securities law claims were filed too late, Brian Pastuszenski, a lawyer for Countrywide, said at a hearing today in federal court in Los Angeles. U.S. District Judge Mariana Pfaelzer took the request under submission without indicating when she may rule.

Pastuszenski argued the FHFA was wrong to ask the judge to interpret the 2008 Housing and Economic Recovery Act as extending the agency’s deadline for filing a claim under the 1933 Securities Act.

“It would give the FHFA carte blanche to pursue claims for Freddie Mac and Fannie Mae,” Pastuszenski said. “At some point it ends, your honor.”

The FHFA sued Countrywide last year as conservator of Freddie Mac and Fannie Mae, the government-sponsored enterprises created to support the housing market by buying residential mortgages in the secondary market. It alleges negligent misrepresentations and fraud related to the offerings of Countrywide mortgage-backed securities.

‘Underwriting Guidelines’

“Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrower to repay their mortgage loans,” the FHFA said in its complaint.

Freddie Mac and Fannie Mae bought $26.6 billion worth of residential mortgage-backed securities Countrywide sold from Aug. 30, 2005, to Jan. 23, 2008, according to the complaint, which was originally filed in state court in New York last year and moved to federal court in Los Angeles. The agency also seeks to hold Bank of America, which bought Countrywide in 2008, liable as successor of the mortgage lender.

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.

Christine Chung, a lawyer for the FHFA, said at the hearing that Congress, when it enacted the 2008 Recovery Act and created the agency, expressly gave it more time than otherwise would have been available under applicable statutes to investigate and bring claims on behalf of Freddie Mac and Fannie Mae.

“There’s one set of rules for everybody else and one set of rules for the agency,” Chung said.

Three Years

The FHFA brought its lawsuit against Countrywide in September of last year to make sure that it would fall within the three years the agency had from the time of the start of its conservatorship in September of 2008 to file tort claims on behalf of Freddie Mac and Fannie Mae, Chung said.

Bank of America and the other defendants, including former Countrywide executives and underwriters of the Countrywide mortgage-backed securities, are seeking now only to dismiss the FHFA’s claims based on timeliness, venue and jurisdiction issues and can still ask to have the claims thrown out for other reasons, according to court filings.

Pfaelzer has dismissed as time-barred securities law claims by other investors in Countrywide mortgage-backed securities that weren’t included in the first lawsuits filed in 2007 and 2008. She also has dismissed claims that Bank of America is liable as successor of Countrywide.

U.S. District Judge Denise Cote in Manhattan in May refused to throw out the FHFA’s securities law claims against UBS AG over mortgage bonds bought by Freddie Mac and Fannie Mae. Cote dismissed the FHFA’s negligent-misrepresentation claims.

17 Banks

The FHFA sued 17 banks including Charlotte, North Carolina-based Bank of America, JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc. and Deutsche Bank AG. Most of the suits were filed in federal court in Manhattan in September 2011 or moved to the court later. Mortgage-backed securities cases against Countrywide are being coordinated in Los Angeles.

Countrywide, based in Calabasas, California, was once the biggest U.S. residential lender, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The bulk of them were sold to investors as mortgage-backed securities.

Former Countrywide Chief Executive Officer Angelo Mozilo in 2010 agreed to a record $67.5 million settlement to resolve U.S. Securities and Exchange Commission claims that he misled investors. The Justice Department in February ended a criminal investigation of Mozilo without bringing charges.

The case is Federal Housing Finance Agency v. Countrywide, 12-01059, U.S. District Court, Central District of California (Los Angeles.)

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