The banks have nothing but bad karma for them this week. And the banks have been hit with another lawsuit. No, it is not from a homeowner, law firm, or organization. It is from the federal government. The Federal Housing Financial Agency (FHFA) filed a lawsuit on September 2 against 17 banks. And here is the list of the banks. And notice Wells Fargo's name is absent from the lawsuit:
- Ally Financial Inc. f/k/a GMAC, LLC
- Bank of America Corporation
- Barclays Bank PLC
- Citigroup, Inc.
- Countrywide Financial Corporation
- Credit Suisse Holdings (USA), Inc.
- Deutsche Bank AG
- First Horizon National Corporation
- General Electric Company
- Goldman Sachs & Co.
- HSBC North America Holdings, Inc.
- JPMorgan Chase & Co.
- Merrill Lynch & Co. / First Franklin Financial Corp.
- Morgan Stanley
- Nomura Holding America Inc.
- The Royal Bank of Scotland Group PLC
- Société Générale
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well Tom, it`s very interesting. Basically the Federal regulator that`s suing these banks as an investor and they`re saying the banks when they (INAUDIBLE) go with these complicated mortgage-backed securities basically they didn`t follow underwriting procedures and essentially lied to investors about the ability of these borrowers to repay their loans. Very interesting detail in here is that some of these suits allege that the banks hired due diligence firms to make sure that these loans were OK and then ignored their advice. If that`s true, that`s very damaging.
And Darren is right. If it is true, this could not only damage the banks' reputation but the financial institution assets. Here are two examples from FHFA lawsuit that alleges that the banks ignored the third party due diligence firms' advice on the loans. One example is from the Bank of America lawsuit:
85. For instance, BOA retained third-parties, including Clayton Holdings, Inc.
(“Clayton”), to analyze the loans it was considering placing in its securitizations, but waived a
significant number of loans into the Securitizations that these firms had recommended for
exclusion, and did so without taking adequate steps to ensure that these loans had in fact been
underwritten in accordance with applicable guidelines or had compensating factors that excused
the loans’ non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the “NYAG”) to provide
documents and testimony regarding its due diligence reports, including copies of the actual
reports provided to its clients. According to The New York Times, as reported on January 27,
2008, Clayton told the NYAG “that starting in 2005, it saw a significant deterioration of lending
standards and a parallel jump in lending expectations” and “some investment banks directed
Clayton to halve the sample of loans it evaluated in each portfolio.”
86. BOA was negligent in allowing into the Securitizations a substantial number of
mortgage loans that, as reported to BOA by third-party due diligence firms, did not conform to
the underwriting standards stated in the Registration Statements, including the Prospectuses and
Prospectus Supplements. Even upon learning from the third-party due diligence firms that there
were high percentages of defective or at least questionable loans in the sample of loans reviewed
by the third-party due diligence firms, BOA failed to take any additional steps to verify that the
population of loans in the Securitizations did not include a similar percentage of defective and/or
questionable loans.
87. Clayton’s trending reports revealed that in the period from the first quarter of
2006 to the second quarter of 2007, 30 percent of the mortgage loans BOA submitted to Clayton
to review in residential mortgage-backed securities groups were rejected by Clayton as falling
outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found
defective, 27 percent of the loans were subsequently waived in by BOA without proper
consideration and analysis of compensating factors and included in securitizations such as the
ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports,
available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#
documents.
And the other example is from the JP Morgan Chase lawsuit:
217. JPMorgan, Bear Stearns, WaMu, and Long Beach were negligent in allowing into
the Securitizations a substantial number of mortgage loans that, as reported to them by thirdparty
due diligence firms, did not conform to the underwriting standards stated in the
Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon
learning from the third-party due diligence firms that there were high percentages of defective or
at least questionable loans in the sample of loans reviewed by the third-party due diligence firms,
JPMorgan, Bear Stearns, WaMu, and Long Beach failed to take any additional steps to verify
that the population of loans in the Securitizations did not include a similar percentage of
defective and/or questionable loans.
218. The Financial Crisis Inquiry Commission (the “FCIC”)10 found that in the period
from the first quarter of 2006 to the second quarter of 2007, 27 percent, 16 percent, 27 percent,
and 9 percent of the mortgage loans JPMorgan, Bear Stearns/EMC, WaMu Bank, and WaMu Securities submitted, respectively, to Clayton to review in RMBS loan pools were rejected by
Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that
Clayton found defective, 51 percent, 42 percent, 29 percent, and 50 percent of the loans were
subsequently waived in by JPMorgan, Bear Stearns/EMC, WaMu Bank, and WaMu Securities
without proper consideration and analysis of compensating factors and included in
securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See The
Financial Crisis Inquiry Report, at 167, Jan. 2011, available at http://fcicstatic.
law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.
There is no doubt that the banks will want to settle with FHFA as the banks are dealing with so many other lawsuits as well as a settlement with the 50-state Attorneys General robo-signing probe. It is interesting timing by FHFA to file this lawsuit when the banks' stocks tanked on Friday, and as the banks are battling lawsuits and litigations. But how much money is FHFA looking for in this lawsuit. Reporter Darren Gersh weighed in with Tom Hudson on Nightly Business Report:
HUDSON: Very damaging. It`s not the first time the banks have been alleged to have behaved improperly when it came to handing out these mortgages. But I want to ask first about any possible remedies here as they try to negotiate a settlement, perhaps.
GERSH: You know Tom, when I was adding up the amount of money involved and how much the Federal regulators want back, I thought my calculator was going to catch on fire. They`re asking for $188 billion. Then they want some damages, which would be hard to get. One very important thing -- the Federal regulators, the Federal Housing Finance Administration, has hired plaintiffs` lawyers. These are private firms, very skilled in security lawsuits, very aggressive. They`re serious.
And how did Darren come up with $188 billion as a possible dollar figure that FHFA want? Well, in each lawsuit of the 17 banks, FHFA disclosed how much Fannie Mae and Freddie Mac bought from each particular bank and subsidiary. And it does add up to around $188 billion:
• JPMorgan Chase: $33 billion
• RBS: $30.4 billion
• Countrywide (now Bank of America): $26.6 billion
• Merrill Lynch (now Bank of America): $24.8 billion
• Deutsche Bank: $14.2 billion
• Credit Suisse: $14.1 billion
• Goldman Sachs: $11.1 billion
• Morgan Stanley: $10.5 billion
• HSBC: $6.2 billion
• Bank of America: $6 billion
• Barclays: $4.9 billion
• Citigroup: $3.5 billion
• Nomura: $2 billion
• Société Générale: $1.3 billion
• First Horizon: $883 million
The banks have created their own demise. This lawsuit will cost them. How much? We just have to wait and see how big or little the settlement will be for the government. Whatever is the outcome from this lawsuit, someone will be left holding the bag: the banks, the government or both. Let's not forget Fannie and Freddie's bad behavior in the entire housing mess as U.S. Treasury used the two government mortgage giants for buying toxic mortgages and having taxpayers flip the bill of Fannie and Freddie debt. But, this lawsuit will rattle the investors that were duped by these same banks in buying mortgage-backed securities. The question is will all of the investors that brought the toxic mortgage-backed securities from the 17 banks follow FHFA's path?
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