It’s been very hard to determine how much the FHFA is seeking in their lawsuit against leading banks in the mortgage bond scandal. We knew the total value of the mortgage backed securities in the suit – around $250 billion – but not precisely the amounts FHFA would ask for. Public radio’s Marketplace takes a look, and comes up with an eye-popping figure. They dug up a research note by the form Keefe Bruyette & Woods.
KBW’s “very preliminary analysis” suggests that the FHFA lawsuits – if they’re successful – could cost banks about $60 billion [...]
that’s not all. If the FHFA makes a winning case, those bad loans could end up changing hands again, with all the sales considered void. (Think of this like the times you try to untangle your computer cord but then you end up having to unplug everything and you end up with a big mess.) KBW notes, “If FHFA is successful in showing that securities laws were violated then the loss would not be restricted to defective loans. The sale could be rescinded and the securitizer would receive the loans back. In this case, the loss to the originator would be the difference between cost and market value for all loans in the securitization, not just the defective ones. In our analysis, we assume losses on all defective and delinquent loans.”
KBW dismisses the potential success of the lawsuit, but they basically buy the argument from the banks that Fannie and Freddie were “sophisticated investors” and they shouldn’t have been duped. This is contradicted by the fact that the banks made material misstatements of fact when they sold the bonds, and they knew they were doing it because they hired third-party due diligence companies to assess the underwriting standards, found them to be substandard in a high degree of mortgages, and then used that information to get discounts from the originators rather than throwing the bad mortgages out of the deals. There’s also the securitization time bomb, the argument made by FHFA that banks did not properly convey the mortgages to the trusts, creating “non-mortgage backed securities” and nullifying the sale. Contra KBW, these are strong lawsuits, and if they carry the price tag of $60 billion, it’s devastating to the banks.
Incidentally, as a federal agency FHFA has subpoena power and can uncover more evidence to this effect from the banks. All the more reason why bank stocks are tanking.
Brad Miller held a chaotic conference call (Zero Hedge tweeted out the phone number for it, bringing out the trolls) where he endorsed the FHFA actions. And while the NY Observer saw fit to make fun of this exchange, it’s the entire point:
REPORTER: As you said, Bank of America is over $50B of the $250B here. Are you concerned that this lawsuit could have a catastrophic effect on the bank or…
REP. MILLER: I think that the rule of law really does require that we peruse those claims, if [people's] legal rights are violated. To think that those claims should not be perused or obstructed in the case of private litigants is destructive. I think the public has a right to know that, um, these largest banks are not getting an backdoor subsidy or bailout. I understand that Bank of America has been under pressure because of mortgage litigation, but this is not news, and has been a long time coming. Regulators have had ample opportunity to take this into account. Bank of America is in a far better position to raise capital six months ago or a year ago than they are now.