Banks face $200bn US subprime suit
LENDERS were dealt a heavy blow on Friday as a US federal agency filed 17 lawsuits against banks for allegedly mis-selling securities based on mortgages in the run-up to the financial crisis.
Shares in Bank of America, the worst-hit, tumbled more than eight per cent on the news.
The Federal Housing Finance Agency, which oversees the running of stricken government-backed mortgage investors Fannie Mae and Freddie Mac, is suing over the supposed mis-selling of $196bn in residential mortgage-backed securities (RMBS), for an unspecified amount in damages.
Bank of America (BoA) is being sued over $57.5bn in securities in total, most through its ownership of mortgage-lender Countrywide Financial and investment bank Merrill Lynch, which was a major player in mortgage securitisation pre-2008. BoA’s direct exposure accounts for just $6bn of the total.
The suits brought against JP Morgan Chase and RBS are the next largest: the value of the RMBS in dispute in each case is $33bn and $30.4bn respectively. Barclays is also being sued over $4.9bn in securities and HSBC over $6.2bn’s worth.
The case is one of the biggest yet in an ongoing hangover of lawsuits related to the financial crisis. FHFA accuses banks of misleading Fannie Mae and Freddie Mac over the quality of the mortgages backing the assets.
It says that the RMBS prospectuses “were false and misleading” and that banks “misrepresented such material information as loan-to-value ratios” by over-valuing homes whose prices they should have known were inflated.
Government-sponsored Fannie and Freddie were some of the biggest buyers of RMBSs and subprime mortgages, leaving them with trillions in dodgy assets and leading to a rescue by the Federal Reserve.
BANK OF AMERICA
The Federal Housing Finance Agency (FHFA) is suing Bank of America over $6bn in residential mortgage-backed securities (RMBS) bought by Fannie Mae and Freddie Mac 2005-2007. It is also suing a dozen individual officers of BoA or its subsidiaries. It accuses the bank of failing to conduct proper due diligence and ignoring analysis that said some of the mortgages were not underwritten properly. BoA says that its accusers “claimed to understand the risks” associated with the assets.
GMAC, ALLY FINANCIAL & RESIDENTIAL CAPITAL
The FHFA accuses GMAC, Ally Financial and Residential Capital of misleading Freddie Mac on $6bn worth of RMBS it bought between 2005 and 2007. Among the accusations are that the prospectuses for the securities in question overstated the number of owner-occupied homes in the mortgage loan portfolio and that they overstated the value of the homes in question and therefore gave falsely low loan-to-value ratios.
The FHFA accuses Barclays of selling $4.9bn in mortgage-backed securities to both Fannie Mae and Freddie Mac on the basis of misleading statements about the credit-worthiness of the borrowers of the underlying mortgage loans. It is also suing the individuals who vouched for the accuracy of the information supplied on the mortgages: these include Michael Wade, former chief of Barclays subsidiary SABR, and SABR’s former chief financial officer John Carroll.
Deutsche Bank is being sued over $14.2bn in RMBS that it sold to Fannie Mae and Freddie Mac between 2005 and 2007. The FHFA is also suing three individuals for signing off on the underlying mortgages: Douglas Johnson, Evelyn Echevarria and Julianna Johnson. As in many of the other suits, Deutsche is accused of giving incorrectly low loan-to-value ratios and overstating the number of owner-occupied homes in the underlying mortgage portfolio.
In one of the smallest cases being brought, First Horizon is being sued over $883m in RMBS that it sold to Fannie Mae and Freddie Mac 2005-2007. Four individuals are being sued for signing off on the prospectuses of the securities in question. As in the other cases, First Horizon is accused of mis-stating the number of owner-occupied homes in the mortgage portfolio and giving loan-to-value ratios that proved to be false.
SocGen is being sued by the FHFA over $1.3bn in RMBS bought by Fannie Mae and Freddie Mac. As in the other suits they are being accused of overstating the number of owner-occupied homes in the mortgage loan portfolio and overstating the value of the homes. The value of RMBS SocGen is being sued over is at the lower end of the spectrum. Individual defendants include Arnaud Denis, Abner Figueroao and Tony Tusi all of whom have worked for SocGen Mortgage Securities.
HSBC NORTH AMERICA
The FHFA is suing HSBC over $6.2bn in RMBS it sold to Fannie Mae and Freddie Mac from 2005 to 2007. It’s also suing individuals Neal Leonard, Gerard Mattia, Todd White, Todd White and Jon Voigtman, all of whom it says had roles in signing off on the underlying mortgages. As with the other cases, the accusations centre on supposedly inflated home values and borrower credit-worthiness as well as overstatement of the number of owner-occupied homes in the portfolio.
Morgan Stanley is being sued over $10.6bn in RMBS bought by Fannie Mae and Freddie Mac 2005-2007. As in many of the other cases, it is accused of bundling mortgages into securities from originators who disregarded proper underwriting guidelines, as evidenced, FHFA says, by the drop in ratings and rise in delinquencies seen after the RMBSs were purchased. Seven individuals are also being sued as part of the case.
Merrill Lynch is accused of selling $24.9bn in RMBS that involved misinformation about the underlying mortgages. This case amplifies the financial crisis headache for Bank of America, which bought Merrill Lynch in 2008 and now has responsibility for its liabilities. Some of the securities were sold through a Merrill subsidiary First Franklin Financial. Half a dozen individuals are being sued, for similar reasons as in the other cases.
Citigroup is being sued over $3.5bn worth of RMBS. Citigroup Global Markets Realty is responsible for nine out of the 10 suspect Citigroup securitisations. The bank faces similar charges to its peers.The FHFA argues the defendants, who include Susan Mills, Richard Isenberg and Randall Costa had “enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring [their] accuracy or completeness”. They are being accused of failing to conduct adequate and sufficient due diligence.
This Bank of America-owned mortgage lender is accused of mis-selling $26.6bn of RMBS to Fannie and Freddie from 2005 to 2008. Along with direct exposure and potential liability through Merrill Lynch, BoA will be fighting lawsuits over a staggering $57.5bn in securities. The Countrywide case repeats similar accusations as do the others: the firm is alleged to have given loan-to-value ratios that were systematically too low and to have over-stated the degree of owner-occupancy of the mortgage portfolio. Nine individuals are also being sued as part of this case.
The US operations of Credit Suisse is facing questions over $14.1bn of RMBS, towards the top end of the league-table of banks being sued. It is being sued over 43 suspect loan portfolios sold to Fannie Mae and Freddie Mac between 2005-2007. Individual defendants include then-president of Credit Suisse First Boston (CSFB) Mortgage Capital and CSFB Mortgage Acceptance Andrew Kimura, then-director of CSFB Mortgage Securities Jeffrey Altabef and then-director of CSFB Mortgage Securities Evelyn Echevarria.
ROYAL BANK OF SCOTLAND
RBS is accused of selling $30.4bn in RMBS to Fannie Mae and Freddie Mac between 2005 and 2008 on the basis of misleading prospectuses. That is the third-largest RMBS value sold by a single bank over which the FHFA is suing. As in other cases, FHFA says that the bank mis-stated the number of owner-occupied mortgages in the securities portfolios and that it failed to evaluate whether borrowers’ statements of income and debt were reasonable or not. Also facing a suit are five individuals who worked in RBS’s mortgage securities businesses. RBS says it will “vigorously defend” itself against the accusations.
GENERAL ELECTRIC CAPITAL
The FHFA is suing the finance arm of General Electric, the tech, energy and industrials giant, over $549m of RMBS that it says were mis-sold, which is the lowest value of securities being disputed in any of the 17 suits. There are no individuals being sued in this case. The accusations are very similar to those being levelled at other RMBS-sellers being sued: GE Capital is accused of mis-stating the value of homes and overstating the number of owner-occupied homes in the RMBSs’ underlying mortgage portfolio.
Goldman is accused of selling the securities in question to Fannie Mae and Freddie Mac from 2005 to 2007, with a total value of $11.1bn. Goldman is accused of selling securities that it knew were overvalued. “Goldman internally characterized its offerings as ‘junk,’ ‘dogs,’ ‘big old lemons,’ and ‘monstrosities’,” says the suit. The individuals also being sued are Peter C. Aberg, Howard S. Altarescu, Robert J. Christie, Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel, Daniel L. Sparks and Mark Weiss, all of whom worked at some point for Goldman Sachs Mortgage Securities.
Nomura is being sued over $2bn of RMBS. It faces the familiar charges of overstating the number of owner-occupied homes in the mortgage loan portfolio and overstating their value. Nomura Credit began purchasing residential loans in 2002 and began actively securitising residential mortgage loans in April 2003. It was also the sponsor for each of the securitisations. Nomura Securities was the lead or co-lead underwriter for three of the securitisations. Individual defendants include former Nomura Securities managing director Dante Larocca.
JP MORGAN CHASE
JP Morgan Chase is exposed to the second biggest number of questionable RMBS of all the parties being sued by the FHFA, at $33bn. Individuals at the bank who will be called as defendants include the then-president of JP Morgan Acceptance Corporation, Louis Schioppo, who served as a controller and chief financial officer in New York at the time of the securitisations. Its case will provide a centre-point in the hearings, with many of the claims in question stemming from its purchase of failing bank Bear Stearns. Like others, it is being sued for overstating the number of owner-occupied homes in the mortgage loan portfolio and overstating their value.