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.