Federal Securities Law Blog

On Friday September 2, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed lawsuits in state and federal court in New York and Connecticut against 17 different financial institutions (including Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and JP Morgan), certain of their officers and various underwriters, alleging violations of the federal securities laws and common law relating to the sale of mortgage-backed securities. In its news release, the FHFA claimed alleged that "the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to" Fannie Mae and Freddie Mac.

The impact of mortgage-backed securities on the 2008 financial crisis has been an important focus for regulators and Congress (as previously discussed here). According to an article in the Washington Post, the securities sold to Fannie Mae and Freddie Mac totaled nearly $200 billion and that the firms "significantly overstated the ability of the borrower to repay their mortgage loans." The article also highlighted the "contradictory relationship" between the Government (noting that the 17 lawsuits "represent an escalation in the government’s effort to recoup taxpayer losses incurred during the financial crisis") and the financial firms (noting that the lawsuits may have a significant impact "on the health of the already struggling banking sector and the prospects for a housing market recovery").

The FHFA are seeking damages and civil penalties under the Securities Act of 1933, and state that the complaints are similar to a lawsuit filed earlier this summer against UBS Americas, Inc. The agency has held discussions with some of firms and have stated that "where [the discussions are] constructive, they will continue."