U.S. sues banks over subprime mortgages

The U.S. government sues 17 financial firms, including the largest U.S. banks, for selling billions in mortgage-backed securities that turned toxic when the housing market collapsed.

The U.S. government on Friday sued 17 financial firms, including the largest U.S. banks, for selling to its mortgage agencies billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.

Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.

The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgage loans and mortgage securities issued by the lenders in order to increase the pool of credit available to U.S. homebuyers.

The suit comes after subpoenas issued to the banks last year. ((Lucy Nicholson/Reuters))
The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion US.

The government didn't say how much it is seeking in damages. It said it wants to have the securities sales cancelled and wants to be compensated for lost principal, interest payments as well as for attorney fees.

The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the U.S. and European economies.

It is particularly damaging to Bank of America, which bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.

After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.

Bank of America has already paid $12.7 billion this year to settle similar claims. Last month insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments.

Bank stocks fall 

In a statement Friday, Bank of America rejected the claims in the government's lawsuits.

Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn't have the needed risk-management capabilities, the bank said. "Despite this, [Fannie and Freddie] are now seeking to hold other market participants responsible for their losses," it said.

Bank stocks fell sharply on Friday as news of the government's lawsuits emerged. Bank of America tumbled 8.3 per cent, JP Morgan Chase fell 4.6 per cent, Citigroup lost 5.3 per cent, Goldman shed 4.5 per cent and Morgan Stanley ended down 5.7 per cent.

Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.

Similar lawsuit in July

The FHFA said the mortgage-backed securities were sold to Fannie and Freddie based on documents that "contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans."

The FHFA filed a similar lawsuit in July against Swiss bank UBS AG, seeking to recoup more than $900 million in losses from mortgage-backed securities.

Also sued Friday were are Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Nomura Holding America Inc., and Société Générale.

JPMorgan, Goldman, Citigroup and Morgan Stanley declined to comment on the lawsuits. Ally Financial said in a statement THAT the government's "claims are meritless, and the company intends to defend its position aggressively." A spokeswoman for First Horizon said the bank intends to "vigorously defend" itself.

Ken Thomas, a Miami-based banking consultant and economist, said he expects the banks to settle soon with the government.

"This will be nothing but a distraction to them, and the quicker you settle something like this, the better," he said.

Next Wednesday marks the third anniversary of the FHPA's takeover of Fannie Mae and Freddie Mac., and there are suggestions that regulators are worried it would be harder to make any claims against the banks after a three-year statute of limitations expires.