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.

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.

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.