Cluck-Cluck: Chickens Come Home To Roost for Banks

Posted on September 3, 2011

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Feds Sue Mortgage Companies

The federal agency that runs Fannie Mae and Freddie Mac is set to sue major American banks for losses related to bad underlying mortgages. Those mortgages were bundled together and sold like bonds. Why not? thought the bankers. They give a monthly return like bonds, don’t they? So those securities were sold to others when there was a lot of reason to know that many of those mortgages given out had no supporting documentation and had a high likelihood of defaulting. That means that the bonds based on those mortgages would eventually be worth nothing. The banks that created the mortgage-backed bonds knew they were selling junk that would eventually fail. Fannie Mae and Freddie Mac were angry that they had to cover these losses, so now they are planning on suing the major banks.

“The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.”

“The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.”

See New York Times for full article.

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