Press reports that suggest as much as $200 billion is being sought in lawsuits filed against issuers of private-label mortgage-backed securities are exaggerated, according to the regulator of Fannie Mae and Freddie Mac.
On Friday, the Federal Housing Finance Agency announced that 17 lawsuits were filed against issuers of private-label securities.
But after press reports put the amount of damages sought at $200 billion, FHFA issued a statement Tuesday offering further clarification.
While Fannie and Freddie invested $200 billion in private-label securities in the years leading up their collapse, not all of the issuers of those securities were sued.
In addition, the $200 billion figure represents the original amount invested and doesn’t factor in principal repayments already made or the current value of the securities.
“At this time, it would be premature and potentially misleading to estimate the size of any potential recoveries,” the statement said.
The amount recovered will be determined after evidence is presented and considered in court.
FHFA explained that while there is speculation that the lawsuits could negatively impact the defendants, disrupt the economic recovery or increase the cost of capital, “the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws.”
One of the defendants named in the lawsuits, Ally Financial Inc., issued a statement Friday indicating that it considers the claims “meritless” and plans to “defend its position aggressively.”
“Freddie Mac is a sophisticated investor and elected to take certain risks with respect to purchasing securities,” the Detroit-based firm stated. “The losses Freddie may have sustained related to those securities are a result of market forces, not any alleged errors or omissions by Ally in connection with the securities.”
But FHFA defended the litigation, noting in today’s announcement that regardless of how big or sophisticated an MBS investor is, securities laws require issuers to provide an accurate representation of the securitized loans.
Neither firm was an originator of the securities and both relied on the representations by issuers that accompanied the securities, according to the regulator.
“The mortgages backing the PLS sold to the enterprises were often a part of a larger pool of mortgages and the securities sold to the enterprises were often customized for their purchase because of the conforming loan requirements of their charters,” the statement said. “Like other PLS investors, the enterprises did not have access to the loans underlying these securities and each enterprise ultimately relied upon the security issuer to accurately describe the mortgages backing the security in the marketing and sales materials, as required under federal securities laws.”
Another of the defendants, First Horizon National Corp., reportedly told The Commercial Appeal that it will “aggressively” defend itself. A former chief financial officer for First Horizon, Marty Mosby, speculated that the case won’t make it to trial.
FHFA clarified that the lawsuits are unrelated to investigations by state attorneys general — which focus on foreclosure processing and not MBS issuance.
Related:
MBS Litigation Tsunami hits Financial Firms
The regulator of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. has filed a host of lawsuits over soured investments made by the two companies in private-label residential mortgage-backed securities. Among dozens of defendants named are the chief executive officer of PennyMac and the CEO of GMAC Mortgage LLC.
