The New York Times scoop that Fannie and Freddie’s regulator, the Federal Housing Finance Agency, is suing the big banks over toxic mortgage assets adds a sort of government imprimatur to the wave of putback lawsuits by private investors.
The funny thing about this case is that it’s somewhat surprising that The Government, so to speak, almost surely doesn’t want to bring it, even though it’s clearly a slam-dunk. That the banks “misrepresent(ed) the quality of mortgage securities they assembled and sold at the height of the housing bubble” is empirical fact. Check out the reporting on Clayton Holdings, which told the Financial Crisis Inquiry Commission that half of the mortgages it checked out during the crisis didn’t meet standards banks promised investors. It told the banks this, and they used Clayton’s reports to demand cheaper prices on the loans they bought to securitize—without passing on the savings or bothering to tell the folks they sold them to.
But the Obama administration primary goal has been to protect the banks, not correct them—much less make them pay for part of their sins, which only took down the global economy and cost some forty or fifty percentage points of GDP. We need to see some reporting on how Treasury views the FHFA move. It’s surely giving Tim Geithner some major heartburn and as Felix Salmon (a contributing editor here) writes, it makes the global mortgage settlement the administration has pushed look even more unlikely.
It was just Wednesday, as David Dayen points out, that Brad Plumer and Ezra Klein reported that Geithner had looked for ways to fire FHFA acting director Edward DeMarco (something Treasury denies). He’s still in place because Republicans, then still in the minority, blocked Obama’s pick last November.
We get just a hint of tension this morning, though not from the NYT. The Financial Times, for instance:
But it is a deeply controversial move within the Obama administration, which is looking to ensure that the economy avoids a double-dip recession and that the banking system remains on an even keel. The US Treasury and the FHFA have not always seen eye to eye on financial policy since the crisis.
We need more on that angle in the coming days.
The reporting is all over the place on the critical question of how many private-label mortgage securities Fannie and Freddie have and how much they’ve lost on them. The Wall Street Journal says it’s $227 billion as of a month ago, but doesn’t tell us how much they’ve lost. The FT says Fan/Fred purchased $883 billion in private mortgage bonds, but doesn’t say how much they still own or how much they’ve lost . The NYT reports this:
As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.
But the Times doesn’t give us an overall number on non-subprime private-label holdings. Let’s hope everyone gives us more clarity in their second-day coverage.
Beyond that, there’s some confusion on why the suits are being filed now—or if they need to be filed. Here’s how the WSJ credits the Times’s scoop:
News of the filing deadline for the lawsuits was first reported Thursday night on the website of the New York Times.
The FT directly contradicts the Times’s assertion that the U.S. needed to file the lawsuit now to get in under the statute of limitations:
Fannie Mae, Freddie Mac and FHFA had signed agreements with the biggest mortgage bond issuers preserving their right to sue the firms for alleged fraud even if the respective statutes of limitations ran out, two people familiar with the matter said.
Wall Street’s excuses are worth a chuckle or two. Here’s the paraphrase from the NYT
But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.
Of course, the broader downturn in the economy and housing market was caused by how the mortgages were originated and packaged into securities. Without that, there is no bubble and no crash.
Industry figures were scathing on the move on Thursday night. “You have a very activist law firm that’s skilled in this dramatic flashy stuff,” said one. “The idea that Fannie and Freddie are victims doesn’t stand up on its face. They were involved in creating these securities.”
I don’t like the sourcing on this one. “Industry figures” surely could have been a little more precise, but I don’t doubt that this is a prevailing sentiment. The thing is: It doesn’t matter. If the contract says you will deliver something a certain way and you deliver it in an inferior way, then you’re on the hook.