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FHFA Issues 64 Subpoenas in Private-Label MBS Investigation

The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) is putting a host of private-label mortgage-backed securities (MBS) under the microscope in an effort to examine their role in losses suffered by ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com.


Acting as conservator on behalf of the nation's two largest mortgage investors, FHFA has issued 64 subpoenas to various financial entities, seeking documents related to the GSEs' investments in private-label mortgage bond pools. In particular, the agency is demanding loan files and transaction documents pertaining to the underwriting standards of mortgages that back certain private-label securities from MBS trustees and servicers.

FHFA says the documents will enable it to determine whether the private MBS issuers should be held liable for some of Fannie and Freddie's investment losses. If so, the federal agency says it will recoup funds, which would be used to offset taxpayer support and the GSEs' future capital draws from the U.S. Treasury.

FHFA explained in a press statement Monday that Fannie Mae and Freddie Mac share ""the critical mission of providing liquidity and stability to the nation's secondary


mortgage market,"" and as overseer of the two mortgage companies, FHFA's focus is on preserving and conserving the GSEs' assets. This investigation into the quality of private MBS investments on the GSEs' balance sheets is FHFA's attempt to do just that.

The federal agency has said that the money lost on private-label MBS directly contributed to the capital woes that forced Fannie and Freddie into conservatorship in September 2008 and played a ""significant role"" in the ""large amounts of taxpayer funding"":http://dsnews.comarticles/gse-bailout-146-billion-and-counting-2010-07-06 that the two companies have needed to stay afloat since then.

Both before and during Fannie and Freddie's conservatorship, the two companies have sought to enforce their rights as investors in private-label MBS and recover some of the losses suffered in connection with their portfolios, according to FHFA.

Specifically, the GSEs have attempted to determine whether misrepresentations, breaches of warranties, or other acts or omissions by private MBS issuers merit the repurchase of faulty mortgages. However, FHFA says difficulty in obtaining supporting loan documents has presented a challenge to the GSEs' efforts.

""FHFA is taking this action consistent with our responsibilities as conservator of each enterprise,"" said Edward J. DeMarco, acting director of FHFA. ""By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the enterprises and thus taxpayers.""

Congress provided FHFA with broad subpoena authority in the Housing and Economic Recovery Act of 2008 (HERA). The federal agency said it expects the private-label MBS trusts will fully comply with the subpoenas. If they don't, FHFA says it is ""prepared to take appropriate action"" to obtain the documents it seeks in its inquiry.