Seventeen banks, dozens of their subsidiaries and over
one hundred bank officers were named as defendants in a lawsuit filed Friday by
the Federal Housing Finance Agency (FHFA), conservator of government sponsored
enterprises Freddie Mac and Fannie Mae (The GSEs.) The civil suits, filed in U.S. District Court
for the Southern District of New York and a federal court in Connecticut allege
violations of federal securities laws and common law in the sale of residential
private-label mortgage-backed securities to the GSEs.
According to the suits, "These securities were sold
pursuant to registration statements, including prospectuses and prospectus
supplements that formed part of those registration statements, which contained materially
false or misleading statements and omissions.
Defendants falsely represented that the underlying mortgage loans
complied with certain underwriting guidelines and standards including representations
that significantly overstated the ability of the borrowers to repay their
mortgage loans. These representations
were material to the GSEs as reasonable investors, and their falsity violates"
(multiple) sections of the Securities Act of 1933, portions of the Virginia
Code and of the District of Columbia Code as well as constituting common law
negligent misrepresentation. Certain complaints also allege state securities
law violations. The suits are similar in
content to the complain FHFA filed in July against UBS Americas, Inc.
By far the largest suit was filed against JP Morgan
Chase & Co, along with 39 current and former executives. The suit charges that the company sold the
GSEs $33 billion in loans contained in 103 transactions between September 7,
2005 and September 9, 2007.
In addition to JP Morgan/Chase, suits were filed
against the following institutions with many of the suits involving multiple
subsidiaries and trusts. Virtually all
of the transactions occurred between April 2005 and November 2007.
Ally Financial Inc.
for actions surrounding 21 securitizations sold to the GSEs in the aggregate
amount of $6 billion. At the time of the
sales Ally was known as GMAC LLC.
Bank of America Corporation
and 11 of its executives for the sale of 23 securitizations in the amount of $6
billion.
Barclays Bank PLC
and three of its executives for selling eight pools of mortgage-backed securities
amounting to $4.9 billion
Citigroup, Inc
and eight of its officers for eight pools of securities it sold totaling $3.5
billion.
Countrywide Financial Corporation
and ten of its executives for 86 securitizations initially valued at $26.6
billion. The current owner of
Countrywide, Bank of America Corporation, was named as a party in this suit.
Credit Suisse Holdings (USA), Inc
and 13 executives for selling $14.1 billion in loans in 43 securitizations.
Deutsche Bank AG
and three executives for selling 40 securities with an initial value of $14.2
billion.
First Horizon National Corporation and
four executives for selling five securities valued at $883 million.
General Electric Company
for selling $549 Million in two securitizations. Unlike the other plaintiffs General Electric's
involvement only covered a period of three months in 2005.
Goldman Sachs & Company
along with nine executives is accused of selling $11.1 billion in certificates.
HSBC North American Holdings, Inc.
and five of its officers are being sued for selling $6.2 billion in securities contained
in 17 pools.
Merrill Lynch & Co./First Franklin
Financial Corporation and six officials who are accused of
underwriting or sponsored $24.85 billion in 33 securitizations.
Morgan Stanley
and seven executives involved in the sale of 33 securities with an initial
value of $10.58 billion.
Nomura Holding America Inc
and five executives alleged to have sold the GSEs seven certificates for $2
billion.
The Royal Bank of Scotland Group PLC
and five officers involved in the sale of $30.4 billion in 68 securitizations.
Société Générale
and four executives accused of selling $1.3 billion in three certificates.
FHFA charges that the originators of the mortgage
loans underlying the securities sold to the GSEs systematically disregarded
their underwriting guidelines, especially as regarded the occupancy status of
the mortgaged property, the loan-to-value ratio of the mortgages, and the
ability of the borrowers to repay the loan.
FHFA cites as evidence:
-
Government and private sector
investigations that have confirmed that the originators of the loans failed to
adhere to the stated underwriting guidelines;
-
The collapse of the certificates' credit
ratings which further indicates that the loans were not originated in adherence
to those guidelines;
-
The surge in mortgage delinquency and
defaults which further demonstrate that the originators failed to adhere to
those guidelines.
The suit maintains that "The false statements of
material facts and omissions of material facts in the Registration Statements,
including the Prospectuses and Prospectus Supplements, directly caused Fannie
Mae and Freddie Mac to suffer hundreds of millions of dollars in damages
including, without limitation depreciation in the value of the Certificates." The suit further alleges that the underlying
mortgage loans experienced defaults and delinquencies at a much higher Rate than
they would have if the loans had been underwritten as described in the Registration
Statements.
As an example of the types of carelessness or
misrepresentation FHFA is charging in its suit, below are the first five loan
packages from each of two tables in the suit against Bank of America. The first shows the percentage of loans reported
in the loan prospectus as having a loan-to-value (LTV) ratio at or under 80
percent and the percentage of loans reported to have LTV ratios over 100
percent and the true percentage of such loans of each type that a date review
indicated were actually represented in the pool.
Transaction
|
%
Reported with LTV ratio at or under 80%
|
%
Reported with LTV Ratio over 100%
|
Prospectus
|
Data Review
|
Prospectus
|
Data Review
|
ABFC
2005-WMC1
|
60.68
|
38.88
|
0
|
15.56
|
ABFC
2006-HE1
|
56.39
|
38.67
|
0
|
18.78
|
ABFC
2006-OPT1-G1
|
49.60
|
35.42
|
0
|
20.48
|
ABFC
2006-OPT1 - G2
|
52.53
|
37.82
|
0
|
17.62
|
ABFC
2006-OPT2 - G1
|
70.79
|
48.98
|
0
|
14.56
|
The second table shows the ratings given by the
three top rating agencies - Moody's, S&P, and Fitch on the same loans at the
time the certificates were sold to the GSEs and the ratings given the same
certificates by the same rating agencies prior to July 31, 2011 after the
agencies downgraded the issues. In the case of both tables, the information is
consistent for all transactions named in the BOA suit. In fact, while there were some securitizations
that were ranked by only two agencies, none of the three ever gave a rating
other than what you see below for every BOA transaction they did review.
Transaction
|
Tranche
|
Ratings at Issuance
|
Ratings at July 31, 2011
|
Moody's/S&P/Fitch
|
Moody's/S&P/Fitch
|
ABFC
2005-WMC 1
|
A1
|
Aaa/AAA/AAA
|
Aaa/AAA/AAA
|
ABFC
2006-HE1
|
A1
|
Aaa/AAA/AAA
|
Caa3/CCC/C
|
ABFC
2006-OPT1
|
A2
|
Aaa/AAA/AAA
|
Caa1/A/CCC
|
A1
|
Aaa/AAA/AAA
|
Caa1/A/CCC
|
ABFC
2006-OPT2
|
A2
|
Aaa/AAA/AAA
|
Caa2/BB-/CC
|
A1
|
Aaa/AAA/AAA
|
Caa3/B+/CC
|
FHFA filed
the complaints under the broad authority granted to it by the Housing and
Economic Recovery Act of 2008 and is asking for a jury trial with damages as
determined by that trial to include:
-
Rescission
and recovery of the consideration paid for the Certificates with interest
thereon;
-
Each
GSE's monetary losses including any diminution in value of the Certificates as
well as lost principal and lost interest payments thereon;
-
Attorney's
fees and costs;
-
Prejudgment
interest at the maximum legal rate.
-
Such
other relief as the Court may deem just and proper.