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Financial Firms ‘Disappointed’ FHFA Chose Lawsuits Over Negotiations

The Federal Housing Finance Agency (FHFA) has announced its plans to pursue legal action against financial firms that sold residential mortgage-backed securities to ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com prior to the bursting of the housing bubble.

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The agency's decision could potentially strain relationships between the GSEs and the companies named as defendants, many of whom still sell mortgages to Fannie and Freddie and service home loans held by the two mortgage financiers.

The case against Ally Financial centers around 21 securitizations sold by its mortgage divisions to Freddie Mac between 2005 and 2007. Ally says FHFA's claims that the company misrepresented information about the risk associated with the underlying mortgages are ""meritless.""

""Freddie Mac is a sophisticated investor and elected to take certain risks with respect to purchasing securities,"" Ally said in a statement. ""The losses Freddie may have sustained related to those securities are a result of market forces, not any alleged errors or omissions by Ally in connection with the securities.""

The company noted that it reached a settlement with Freddie Mac in March 2010 related to whole loan claims and with Fannie Mae in December 2010 related to both whole loan and private-label security claims.

Ally says it is ""disappointed that FHFA elected not to continue a more constructive path of negotiations on this particular issue but rather has chosen to utilize the court process.""

Bank of America, whose Countrywide and Merrill Lynch subsidiaries are named in their own individual suits, points out the GSEs have previously acknowledged that their losses related to mortgaged-backed securities were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment.

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""[T]hey claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so,"" Bank of America said in a statement. ""Despite this, the GSEs are now seeking to hold other market participants responsible for their losses.""

FHFA issued its own statement Tuesday to clarify certain points pertaining to the lawsuits. The agency stressed that as conservator of Fannie and Freddie, it is obligated to take the necessary actions to put the GSEs “in a sound and solvent condition” as well as “preserve and conserve the assets and property” of the two entities.

Like other private-label securities investors, FHFA says the GSEs did not have access to the loans underlying the securities in question and ultimately relied on the bond issuers to accurately describe the mortgages backing the security in the marketing and sales materials. The agency notes that such disclosure is required under federal securities laws.

At the heart of the suits is FHFA’s conclusion that the actual mortgages backing the securities had characteristics that “differed in a material way from what had been represented in securities filings.”

“Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold,” according to FHFA.

Still, the firms DSNews.com as spoken with, such as First Horizon National Corporation, say they “will aggressively defend” themselves against FHFA’s allegations.

“We believe the claims brought by the FHFA are unfounded,” said a spokesperson for Deutsche Bank. “Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more, often after hand-picking the loans they now claim should not have been included in the offerings. We will vigorously defend against this action.”

Most of the companies named in the lawsuits are remaining tight-lipped on the matter. Such Wall Street fixtures as Goldman Sachs and Morgan Stanley have spurned to opportunity to comment on the move by FHFA, as did JPMorgan Chase, Citigroup, Société Générale, and Royal Bank of Scotland.

More from DSNews.com’s earlier coverage of FHFA’s announcement on the lawsuits is available ""here on the site"":http://dsnews.comarticles/fhfa-vs-mortgage-powerhouses-what-does-it-mean-for-market-2011-09-02. The legal complaints filed by the agency against each of the firms ""can be accessed online"":http://www.fhfa.gov/Default.aspx?Page=110.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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