US Sues Major Banks Over Faulty Mortgage-Backed Stocks

September 18, 2011

The U. S. government has filed lawsuits against 17 major banks, saying the government lost money — and the 2008 financial crisis was sparked — in part because these banks made their mortgages seem less risky.

The Federal Housing Finance Agency said Friday their review shows that the banks provided marketing and sales material that misrepresented the quality of mortgage-backed securities.

The banks bundled mortgages and sold them to investors, including government-backed mortgage companies Fannie Mae and Freddie Mac during the housing bubble.

Media reports earlier said the FHFA will argue the banks missed evidence the homeowners' incomes were inflated or falsified. When those homeowners' were unable to pay their mortgages, the securities lost value.

Fannie Mae and Freddie Mac lost more than $30 billion combined on the securities. With this lawsuit, the FHFA is seeking repayment from the banks for those losses.

The banks include Bank of America, JPMorgan Chase and Goldman Sachs and others. The FHFA says the lawsuit also names some officers of these banks, as well as some unaffiliated loan underwriters.

The FHFA was created in 2008 to oversee the two mortgage giants. The agency is filing the lawsuits now because a deadline for it to file any claims runs out next Tuesday.

Last month, insurance giant American International Group filed a $10 billion lawsuit against Bank of America and two of its subsidiaries, Countrywide Financial and Merrill Lynch. AIG alleges it was also misled about the real value of the mortgage-backed securities it bought.

In addition to the impending lawsuits, the big banks are also negotiating a $20 billion settlement by attorneys general in all 50 states to address their practice of offering high-risk loans to home buyers who would not have otherwise qualified for a conventional mortgage.