Subprime scandal: ex-Fannie Mae, Freddie Mac execs accused of fraud (The Christian Science Monitor)

Six former top executives at the housing giants Fannie Mae and Freddie Mac misled investors about the subprime-loan risks they faced, the Securities and Exchange Commission alleged in a civil fraud lawsuit Friday.

Those charged include the men who were chief executives of these government-chartered mortgage enterprises. Daniel Mudd headed Fannie Mae and Richard Syron led Freddie Mac as the housing boom ended and the financial crisis began.

The lawsuit is significant because some finance experts have sharply criticized the federal government for failing to prosecute more executives who may have contributed to the financial meltdown, and because the future of Fannie and Freddie is now a matter of hot political debate.

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"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, SEC's enforcement director, in filing the suit in New York. "These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk."

Fannie and Freddie play a major role in the US housing market, providing guarantees for the safety of loans that conform to their standards. Banks and other mortgage lenders are able to issue so-called conforming loans and resell them in bundles to investors (who then reap a stream of income from monthly mortgage payments).

By doing this, the companies have cultivated a broad supply of credit for housing, keeping the mortgage market moving even as other private firms were pulling back during the crisis.

But the firms are oddball entities. Before the crisis, they were publicly owned companies, seeking to show profits and strength to their private shareholders. But they also operated with a Congress-derived mandate to play their unique role in the US mortgage business.

The lawsuit alleges that, when it came to talking to their own shareholders, the six executives played down the financial risks. In the end, by late in 2008, Fannie and Freddie were placed under federal conservatorship. They continue to operate, but their long-term future is a matter that Congress will need to address in the coming year or so.

Fannie and Freddie both entered into agreements with the government on Friday, accepting responsibility without admitting or denying the charges. The government-controlled companies also agreed to cooperate with the SEC on the cases against the former executives.

The Justice Department has opened up probes into Fannie and Freddie but has not charged anyone with a crime.

In a statement released through his attorney, Mr. Mudd said the lawsuit "should never have been brought" and said the government reviewed and approved all the financial disclosures of the company.

"Every piece of material data about loans held by Fannie Mae was known to the United States government to the investing public," Mudd said. "The SEC is wrong, and I look forward to a court where fairness and reason – not politics – is the standard for justice."

Mr. Syron's lawyers said the case was "without merit" and said the term "subprime had no uniform definition in the market" at that time.

According to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books, or just 0.2 percent of its portfolio. The SEC says that Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings. The suit cites similar numbers for Freddie.

SEC documents on Friday quoted a Freddie Mac legal counsel warning the firm's CEO in May 2007, "We should reconsider making as sweeping a statement as we have 'basically no subprime exposure.' " In a speech, Syron still used the line, "basically no subprime exposure," according to the SEC.

So far, the companies have cost taxpayers almost $150 billion – the largest bailout of the financial crisis. They could cost up to $259 billion, according to its government regulator, the Federal Housing Finance Agency.

In July, Citigroup paid just $75 million to settle similar civil charges with the SEC. The company's chief financial officer and head of investor relations were accused of failing to disclose more than $50 billion worth of potential losses from subprime mortgages. The two executives charged paid $100,000 and $80,000 in civil penalties.

Such lawsuits are just part of America's coming to terms with the financial crisis.

Finance experts say that fraud played a role in the housing bubble and crisis, but that other causes were also prominent.

The Financial Crisis Inquiry Commission, tasked by Congress to determine the causes of the crisis, reached a split verdict.

Its report cited failures of corporate governance and ethics. But it also cited broader problems such as failed risk-management practices.

"The crisis was a result of human mistakes, misjudgments, and misdeeds," the report said in part.

• Material from wire services was used in this report.

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Regulator sues major banks over subprime bonds (Reuters)

By Margaret Chadbourn and Jonathan Stempel Margaret Chadbourn And Jonathan Stempel – 1 hr 39 mins ago

WASHINGTON/NEW YORK (Reuters) – A regulator sued 17 large banks and financial institutions on Friday over losses on about $200 billion of subprime bonds, which may hamper a broader government settlement of the mortgage mess left over from the housing crisis.

The lawsuits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, surprised investors, dragging down bank shares and could add billions of dollars of legal costs at perhaps the worst possible time for the industry.

Friday's lawsuits reflects how different parties, including investors, banks and different government groups are fighting over who should bear losses from a housing crisis that in 2008 drove the economy into its worst recession in decades.

The FHFA accused Bank of America Corp and its Countrywide and Merrill Lynch units, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Scotland Group Plc and others of misrepresenting the checks they had done on mortgages before bundling them into securities.

According to the lawsuits, the securities should have never been sold because the underlying mortgages did not meet investors' criteria. As more borrowers fell behind or went into foreclosure, the securities' value fell, causing losses.

Nearly all the banks that were sued declined to comment or were not immediately available for comment. Others called the charges unfounded.

"Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more," said Mayura Hooper, a spokeswoman for defendant Deutsche Bank AG, in a statement.

A Bank of America spokesman said Fannie Mae and Freddie Mac are trying to shift responsibility to banks after earlier blaming losses on other factors. A spokesman for Ally Financial Inc, once known as GMAC, called the FHFA claims "meritless."

Bank of America faces three FHFA lawsuits, covering losses on more than $57 billion of securities. JPMorgan faces claims related to $33 billion of securities and Royal Bank of Scotland was sued over $30.4 billion of securities.

Several large banks are also negotiating with all 50 U.S. state attorneys general on a comprehensive settlement to address mortgage abuses and limit future mortgage litigation.

"This new litigation could disrupt the AG settlement," said Anthony Sanders, finance professor at George Mason University and a former mortgage bond strategist.

Banks might resist settling if they knew litigation from other regulators could deplete capital, he said.

Before the FHFA lawsuits had even hit a court docket, financial experts offered blunt expectations for the outcome.

"The lawsuits will be settled," said Sean Egan, managing director of Egan-Jones Ratings Co, an independent credit ratings firm. "The end result will be a further outflow of cash from the banks, and more importantly an additional black eye."

A TWIST

FHFA director Edward DeMarco is looking to minimize future losses for Fannie Mae and Freddie Mac, which are owned by the government after being seized on September 7, 2008.

The FHFA filed the suits before a three-year statute of limitations expired. Fannie Mae and Freddie Mac are pillars of U.S. mortgage finance.

Wells Fargo & Co, the largest U.S. bank not sued by the FHFA, entered a "tolling" agreement waiving its right to claim the FHFA waited too long to sue, a person with knowledge of the matter said. The bank said Wells Fargo might have done this to give it time negotiate its own settlement, the person added.

FHFA spokeswoman Corinne Russell and Wells Fargo spokeswoman Mary Eshet declined to comment.

The KBW Bank Index closed down 4.5 percent on Friday, nearly doubling the losses of the broader market. Bank of America led the index lower, dropping 8.3 percent.

Bank shares also came under pressure from signs the Federal Reserve could start selling short-term debt on its books and buy long-dated bonds to push longer-term yields lower.

Such a move, known as "operation twist," would hurt banks whose profit margin is tied to the short-term rates at which they fund and the longer-term rates at which they invest.

Major banks already face potential payouts of tens of billions of dollars to settle regulatory charges of abusive mortgage lending and foreclosure practices, and other investor lawsuits over mortgage debt losses.

Such payouts would reduce earnings and weaken capital levels, perhaps harming the ability of banks to lend money and provide much-needed life to a stalled housing market and weakened economy.

Whether to take action for mortgage bond problems had been under discussion since Fannie Mae and Freddie Mac were placed in conservatorship, a person familiar with the matter said.

While the ultimate amount FHFA will seek is still unclear, that person said it could top the $20 billion settlement being discussed by the banks and the state attorneys general.

Arthur Wilmarth, a George Washington University law professor, said the banks might argue Fannie Mae and Freddie Mac knew how risky the securities they bought were.

If the companies had reason to know mortgages were "essentially being given to anyone with a pulse, then banks could argue they were at least partially at fault," he said.

A BLIZZARD

The blizzard of litigation against banks is hurting share prices because investors are unable to estimate the ultimate scope of a given bank's legal liabilities.

Bank of America, for example, had intended its proposed $8.5 billion settlement in June with investors in Countrywide mortgage securities to resolve most litigation tied to its disastrous 2008 takeover of that home loan provider.

But many parties are objecting, and that settlement did not stop insurer American International Group Inc from suing the bank for $10 billion over its own alleged losses.

Nor did it stop Nevada's attorney general from threatening to withdraw from an $8.4 billion nationwide settlement with the bank. The AG now wants to sue the bank, accusing it of reneging on promises to modify mortgages.

Meanwhile, the U.S. Justice Department in May sued Deutsche Bank, accusing it of misleading a U.S. housing agency into believing loans it made qualified for federal insurance.

The FHFA's lawsuits follow an initial lawsuit in July against UBS AG seeking to recover $900 million of losses incurred on $4.5 billion of debt.

One legislator praised the expected FHFA lawsuits.

Brad Miller, a Democratic congressman from North Carolina, said: "Not pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already."

Since Fannie Mae and Freddie Mac were seized, taxpayers have spent more than $140 billion to keep them afloat.

(Reporting by Margaret Chadbourn in Washington and Jonathan Stempel in New York; additional reporting by Clare Baldwin and Lauren Tara LaCapra in New York; Additional writing by Ben Berkowitz and Dan Wilchins; editing by Matthew Lewis, John Wallace and Andre Grenon)

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US sues UBS over dodgy subprime securities (AFP)

WASHINGTON (AFP) – A US housing regulator filed a $900 million lawsuit against Swiss bank UBS on Wednesday over risky mortgage-backed securities it sold to mortgage giants Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, which oversees the two government-controlled home-loan backers, accused UBS of selling to them $4.5 billion of bundled home-loan securities during 2005-2007 that were much more risky than the bank had claimed.

The FHFA said the subsequent downgrades of the securities, as the US housing market crashed and millions of homeowners defaulted on their mortgages, caused Fannie Mae and Freddie Mac to lose "in excess of 20 percent of their entire investment."

It said many of the underlying home loans in the securities were much weaker, and at greater risk of default, than UBS claimed.

"UBS's misstatements and omissions in the registration statements regarding the true characteristics of the loans were the primary and proximate cause of Fannie Mae's and Freddie Mac's losses," the FHFA said in a US court filing in New York.

Many of the loans in the securities were actually so-called subprime, or highly risky, home loans, often with poor or fraudulent documentation, according to the filing.

"Forensic review of several hundred loan files has revealed numerous instances in which there was a failure during the underwriting process to confirm the reasonableness of the borrower's stated income or to correctly account for the borrower's debt."

The collapse in the market for bundled home loan securities is blamed for the failure of numerous financial institutions during the crisis. The government rescued both Fannie Mae and Freddie Mac from bankruptcy in September 2008 and has spent about $164 billion to keep them afloat.

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US regulator sues JPMorgan, RBS in subprime probe (AFP)

NEW YORK (AFP) – A US regulator on Monday sued Wall Street bank JPMorgan Chase and Britain's Royal Bank of Scotland, seeking to recover more than $800 million in losses incurred during the subprime mortgage crisis.

The National Credit Union Administration said it was pursuing the two big banks for actions that led to the collapse of five big credit unions.

In its lawsuit, the NCUA charged the securities firms of the two banks had violated federal and state laws and made misrepresentations in the sale of hundreds of securities to the credit unions, a type of financial institution owned and run by its members.

"NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions," NCUA board chairman Debbie Matz said in a statement.

The regulator vowed to sue other banks that had sold credit unions mortgage-backed securities which plummeted in value during the financial crisis, without specifying which banks would be targeted.

"We expect to file additional actions and seek a total amount of damages in the billions of dollars," Metz said.

"Those who caused the problems in the wholesale credit unions should pay for the losses now being paid by retail credit unions."

Wall Street banks have generally managed to avoid criminal repercussions from the sale of mortgage-backed securities before 2008, although they have been targeted in civil suits.

When it became clear that many of these securities were backed by delinquent subprime borrowers defaulting on their mortgages -- even though they had been branded low-risk by investment banks and ratings agencies -- the global financial system went into a tailspin.

The leading US financial markets regulator, the Securities and Exchange Commission, has sued only one individual, Goldman Sachs employee Fabrice Tourre, for his role in selling mortgage-backed securities.

Shares of JPMorgan Chase dropped 0.9 percent on Monday, although they were also driven down by fears of contagion from the European debt crisis.

JPMorgan Chase did not respond to a request for comment on the lawsuit.

The five credit unions that failed after the crisis -- US Central, Western Corporate, Southwest Corporate, Members United Corporate, and Constitution Corporate -- were wholesale credit unions that provided services to smaller retail credit unions.

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Goldman Closes the Door on Subprime (BusinessWeek)

When Goldman Sachs (NYSE:GS - News) bought Litton Loan Servicing, a firm that collects mortgage payments from homeowners, in 2007 for an unannounced price, it seemed like a simple way to get an on-the-ground view of the subprime market. The insight would help Goldman Sachs figure out how much to pay for loans, and Litton would work with borrowers to get them back on track. Other sophisticated investors, including billionaire Wilbur L. Ross and private equity firm Centerbridge Capital Partners, bought mortgage servicers with a similar strategy in mind.

It didn't work out as planned. While there were plenty of distressed mortgages and lots of eager buyers, the loan holders had little incentive to mark down prices because that would mean taking a big loss on their books. "The distressed-asset market never got as hot as people were hoping it would," says Dean H. DeMeritte, an executive vice-president at Phoenix Capital, a Denver brokerage for mortgage servicing contracts.

On June 6, Goldman Sachs agreed to sell Litton to another mortgage servicer, Ocwen Financial (NYSE:OCN - News), for $263.7 million. The sale comes two months after Goldman Sachs wrote down the value of the business by about $200 million. "It really makes sense for them to sell it," says David B. Hilder, an analyst at Susquehanna Financial Group. "They bought it at a time when the business was easier, and it looked like there might be some insights to be gained in the mortgage market from having a servicer." Neither Goldman Sachs nor Litton would comment.

Founded in 1988 by Larry B. Litton Sr. in Houston, Litton was one of the first mortgage servicers to specialize in working with troubled loans, sometimes called "scratch and dent" servicing. It developed that skill during the savings and loan crisis, when it was hired by Resolution Trust Corp. to handle mortgages that were orphaned by failed banks.

Larry Litton Jr., who now runs the company, is known in the industry for his Texas drawl, straight talk, and vocal support for working with struggling borrowers before they get too far behind. Bruce A. Gottschall, the founder of Neighborhood Housing Services of Chicago, a nonprofit that worked with Litton a decade ago, says the company "seemed to me a little bit more flexible in terms of modifications early on." Litton Jr. currently is a member of the Federal Reserve's Consumer Advisory Council, where he has been vocal about foreclosure prevention. Ocwen would not comment on whether he will stay with the company after the sale.

Litton's business grew with the subprime market. In 1995 it serviced $1.2 billion in loans, according to Fitch Ratings. By 2007 its portfolio had ballooned to almost $54 billion; it's about $41.2 billion today. As the boom gave way to the bust, Litton was forced to hire more staff to deal with rising defaults. The company became the target of class actions alleging excessive fees and violations of consumer-protection laws as well as investigations by state and federal regulators. It has agreed to settle at least one of the lawsuits while denying liability; others are pending. It says it is cooperating with government investigations. Goldman Sachs will remain liable for fines and penalties that could be imposed by government authorities relating to Litton's foreclosure and servicing practices before the deal closes.

With the Litton sale, Goldman Sachs will no longer deal directly with homeowners. Gottschall says Goldman's unloading the mortgage servicer is part of a bigger trend: "Wall Street is probably trying to distance themselves from the problems they caused."

The bottom line: By selling Litton Loan Servicing, Goldman Sachs is out of the messy business of working with distressed homeowners.

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AIG expects other bids for subprime bonds: report (Reuters)

NEW YORK (Reuters) – American International Group (AIG.N) expects others to bid for the mortgage-backed securities that it has offered to pay $15.7 billion to buy back from the U.S. government, the insurer's chief executive told the Wall Street Journal.

AIG disclosed the offer it made to the Federal Reserve earlier this month. The insurer -- which nearly collapsed in the fall of 2008 partly because of the securities -- sold the assets to the Fed as part of its bailout.

In a report published in the Journal on Sunday, AIG CEO Robert Benmosche said the company understands that four banks have looked at the portfolio of assets.

He told the newspaper that at least one bid could emerge that exceeds his company's.

For more than a year, the insurer has been preparing the offer on the bonds, whose values have soared despite rising foreclosures on the underlying loans.

An index of top-rated subprime securities has rallied more than 50 percent since the depths of that market in April 2009, according to Amherst Securities Group.

The New York Fed would make a profit of about $1.5 billion on the portfolio, AIG has said.

AIG could not be immediately reached for comment.

(Reporting by Michael Erman; Editing by Vinu Pilakkott)

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