Following up on an earlier item, not only is the Federal Housing Finance Agency becoming more aggressive in its fight with banks over repurchasing billions of dollars’ worth of soured loans, but they are seeking treble damages to boot.

Auditors at the Federal Housing Finance Agency are in the process of identifying lenders which sold “materially deficient” mortgages to Fannie Mae and Freddie Mac and will bring civil damage claims against these seller/servicers.

The intent, said Health Wolfe, an assistant inspector general in FHFA’s Office of the Inspector General, is to finger “sellers which pose the highest risk” to Fannie and Freddie.

Going after such lenders “has never been done before,” Wolfe said at the American Association of Residential Mortgage Regulators’ annual conference [...]

Wolfe, who is in charge of audits at his agency, said he has already met with the Justice Department’s civil division and expects DOJ to bring triple-damage suits against the worst offenders. “For every dollar Fannie Mae and Freddie Mac paid out, we are going to sue for $3,” he said.

A couple thoughts here. First of all, they’d better get sign-off from DoJ if they expect them to commit to seek treble damages from these lenders. Second, this is an effort to establish best practices in the industry. Many high-risk lenders have been squeezed out of the system already, but those who haven’t would surely be bankrupted by a successful treble-damages claim. Fannie and Freddie are basically the only purchasers of mortgages on the secondary market left, so this is an excellent opportunity to establish the proposition that bad underwriting on loans will be met with serious consequences. And when we’re talking about lenders, at this point we’re talking about the arms of the big banks, who account for 2/3 of all the loans the GSEs purchase.

Fannie and Freddie are not blameless here. They issued variances to their own underwriting standards during the bubble years, in an effort to keep up on loan purchases and market share. They were late to the game, but they fed the breakdown in standards on loans. Now they’re making up for it.

You can say that Ed DeMarco is an ideologue rejecting principal reductions on underwater delinquent loans in ways that defy logic, and you can also say that he has stuck it to the banks in greater ways than practically any other financial regulator. Both of those statements happen to be true.