US Banks Being Sued; Here’s for What

It was on Friday that mortgage news rang out through the world that the U.S. banks were being sued by the Federal Housing Finance Agency (FHFA), on behalf of Freddie Mac and Fannie Mac. But just why are they being sued, and what banks exactly can expect to go to court (or at least shell out some major bucks in damages in order to avoid it?)
All of the banks are being sued for misrepresenting their client’s financial situations when selling mortgage-backed securities to FHFA. But just what is a mortgage-backed security? It’s when a government institution, in this case the FHFA, buys several mortgages from a lender. The monthly payments from those mortgages are then used to pay investors who also receive portions of the payments. The process was put into place so that banks could still have money to offer mortgages on a regular basis, and not worry about running out of money due to the billions of dollars worth of mortgages they are currently loaning. It was the misrepresentation on these specific mortgage applications that was one of the factors that led to many bank foreclosures and ultimately, helped lead the country into the recession.
So, who’s being sued for what? In total there are 17 banks in total being sued. These include: Bank of America; GMAC, Ally Financial & Residential Capital; Barclays; Deutsche Bank; First Horizon; Societe Generale; HSBC North America; Morgan Stanley; Merrill Lynch; CITI; Countrywide Financial; Credit Suisse; Royal Bank of Scotland; General Electric Capital; Goldman Sachs; Nomura; and JP Morgan Chase. Bank of America is the bank with the largest lawsuit held against them, and coming in close seconds are JP Morgan Chase and Royal Bank of Scotland.
The reasons for the lawsuits are many. While all of the banks are being sued different amounts for mortgage-backed securities that were sold to FHFA, mostly during the years 2005 – 2007. However, other banks also have several different lawsuits against them and against individuals that worked at the bank. Some of these lawsuits, such as in the case of Bank of America, are being sued for not performing their due diligence in making sure that their mortgages were being underwritten properly. Other banks, such as GMAC, Ally Financial & Residential Capital are being sued for overstating the value of the homes that they gave mortgages for, which lowers the loan-to-value ratio.
The banks have had very little to say in response to the lawsuits. While some have claimed that Freddie Mac and Fannie Mac were “willing victims” to buying the mortgage-backed securities, arguers say that the corporations couldn’t have possibly known what was going on and even if they did, it doesn’t really matter much at this point. Few banks have responded at all to the suits, simply giving a “no comment” when asked for one.
Whether or not more news will come out of these lawsuits is unknown. But one thing is clear: with the recent lawsuits brought against so many banks on Friday, the United States is still desperately trying to recover from the housing bubble burst in 2008. And they most likely will be for some time. While this mortgage news is bad for the U.S. banks, there is good news for Canadians – it won’t affect us. While we’re at the mercy of things such as the U.S.’ debt level and debt ceiling, these lawsuits are restricted to banks and those that buy mortgages from them. And that means that we’re not likely going to feel any pinch from it.