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MBS Litigation Tsunami hits Financial Firms

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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.

Separate complaints were filed Friday against 17 issuers and underwriters of mortgage-backed securities purchased by Fannie Mae and Freddie Mac.

The lawsuits were filed in U.S. District Court for the Southern District of New York, the Supreme Court of the State of New York and U.S. District Court for the District of Connecticut.

The Federal Housing Finance Agency, which is the regulator of the two secondary lenders, filed the lawsuits as conservator of Fannie and Freddie using its authority granted under the Housing and Economic Recovery Act of 2008.

Violations of the Securities Act of 1933 are alleged.

Allegations in the lawsuits are similar to those made against UBS in a lawsuit filed last month by the regulator.

“The complaints filed today reflect FHFA’s conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings,” FHFA said in a statement. “Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the enterprises for those securities.”

FHFA issued 64 subpoenas a year ago as it tried to determine whether or not private-label issuers should be forced to repurchase loans from Fannie and Freddie.

“The enterprises have attempted to determine whether misrepresentations, breaches of warranties or other acts or omissions by private-label MBS counterparties would require repurchase of loans underlying the private-label MBS by the counterparties and whether other remedies might be appropriate,” the regulator said at the time. “However, difficulty in obtaining the loan documents has presented a challenge to the enterprises.”

Major mortgage lenders named in the lawsuits include Ally Financial Inc., Bank of America Corp., Citigroup Inc. and Countrywide Financial Corp. as well as former player First Horizon National Corp.

Among defendants listed in the Countrywide lawsuit is PennyMac Chairman and Chief Executive Officer Stanford Kurland.

Notably absent was Countrywide founder Angelo Mozilo.

In addition to separately suing BofA and Countrywide, BofA-subsidiaries Merrill Lynch & Co. and First Franklin Financial Corp. were named as defendants in a third complaint.

The chairman and chief executive officer of GMAC Mortgage operations, Thomas Marano, was named in the lawsuit against JPMorgan.

Goldman Sachs & Co. — which yesterday reached a settlement with New York banking regulators, faced a consent order from the Federal Reserve Board and sold off Litton Loan Servicing LP — also faces an FHFA lawsuit.

The other lawsuits were filed against Barclays Bank PLC, Credit Suisse Holdings (USA) Inc., Deutsche Bank AG, General Electric Co., HSBC North America Holding Inc., Morgan Stanley, Nomura Holding America Inc., The Royal Bank of Scotland Group PLC and Société Générale.

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