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I am not sure where this lawsuit is going yet, I don’t understand what can be gained by it other than politically. At the same time, I’m not sure that FHFA doesn’t have a case.
It seems counter-intuitive to me to spend billions of dollars to bail out banks only to turn around and sue them putting them back into the same position again. Wouldn’t it have been easier just to let them fail? Would have saved everyone a lot of money, and with the same net result…
Basically FHFA is claiming that many of the loans in the security bonds sold by these banks were misrepresenting what was contained in the securities; summarized in 2 categories. Category 1, LTV ratios and Category 2, Owner Occupant Status. It seems to me the later one is probably more related to the borrower than the bank that originated the loan as far as “fraud” is concerned… I wonder if FHFA will expand this to go after the borrowers that stated they were owner-occupying they weren’t?
I suspect this will get brushed aside with a settlement and slap on the wrist… But in the mean time, here is some information on FHFA’s claim against the banks. (read full article from HousingWire)
Major banks and others acquired during the financial crisis allegedly misrepresented the owner occupancy and loan-to-value ratios by sometimes as many as 50 percentage points or more on securities sold to Fannie Maeand Freddie Mac, according to the lawsuits the Federal Housing Finance Agency filed last week….
…It looked at whether or not the borrower’s tax bill was sent to the property’s address or a different one, whether the borrower claimed a tax exemption or whether the mailing address of the property was reflected in credit reports, tax or lien records.
On one securitization underwritten by JPMorgan Chase (JPM: 33.44 -3.44%), owners did not occupy 2.5% of the underlying properties, according to the prospectus given to investors. After conducting the test, the FHFA found this number to be at 14.6%, more than five times the amount disclosed to investors.
“The data analysis revealed that for each securitization, the prospectus supplement misrepresented the percentage of non-owner occupied properties,” according to the lawsuits.
The FHFA also conducted retroactive automated valuation models to determine the value of the properties at the time the mortgages were originated. This was done to uncover any possible faulty loan-to-value ratios.
The prospectus for one security issued in 2007 underwritten by Bank of America (BAC: 6.99 -3.59%) stated all of the loans held a LTV ratio of less than 100%. According to the FHFA analysis, more than 8.8% of the loans in the security actually held LTVs above 100%. Another security issued by Countrywide Financial Corp. showed 27% of the loans held LTVs higher than 100%, according to the analysis, as opposed to none.