The U.S. government on Friday sued 17 banking firms for their roles in the housing crash. The financial institutions are being accused of selling $196 billion dollars of now-toxic mortgage backed securities to Fannie Mae and Freddie Mac.
The Federal Housing Agency (FHA) filed suits against Bank of America, Citigroup, JP Morgan chase and 14 others. FHA is the government agency that oversees Fannie and Freddie which raises questions. Is this just a maneuver for Fannie and Freddie to recover some portion of the massive losses that they were responsible for taking on?
Fannie and Freddie have notoriously backed loans with questionable characteristics. So-called NJNA (no job no assets) loans and loans where the borrower was likely borrowing more than they could afford. This created the easy credit climate where banks, under pressure from regulators and community groups like ACORN, were pressed to make sub-prime loans. Now, the government is coming after them.
The law suits will likely have a chilling effect on the economy. Banks as a whole will now be even more timid about being involved with FHA loans that are backed by Fannie and Freddie in fear of reprisals in coming years should the housing crisis worsen.
The banks have spent the last three years rebuilding their balance sheets. Now, the legal fallout from the mortgage crisis is creating a new wave of liabilities for them and uncertainty for the financial system. News that the economy added no jobs in August and that the lawsuits were pending slammed the stock market Friday and sent bank stocks tumbling. – The Wall Street Journal
Making it more difficult for home buyers to get loans will continue to weaken housing demand and depress prices. Current home owners will continue to see their equity, and therefor personal wealth, dwindle.
Bank were pressured by progressive groups and Democrat lawmakers to make loans to lower-income buyers that in many cases could not afford the homes they were buying. In order to defray the risk, financial institutions then packaged up those mortgages into mortgage-backed securities (MBS) which Fannie and Freddie then bought – as did many other institutions.
The suits are specific to the mortgage-backed securities sold to Fannie and Freddie stating that the banks misrepresented that the securities met the FHA’s underwriting rules and overstated the ability of the borrowers to repay the loans.
While the President needs the banking industry to loosen lending rules to create any semblance of a recovery, having his administration go after the largest institutions able to do so will likely create yet another government impediment to growth in the economy.
On one hand the administration is asking these banks to make credit more available to home buyers and home owners while simultaneously suing them for having done just that in the past. That kind of uncertainty and mixed-messaging is precisely what is hindering an economic turn-around.
If the government wants to place blame, a closer inspection of FHA, Fannie and Freddie, and progressive housing policies should be their focus.
The institutions so far named in the law suits are: Ally Financial, GMAC LLC (or what was GMAC), Bank of America, Barclays, Citigroup, Countrywide, Credit Suisse, Deutsche Bank, First Horizon , General Electric, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, First Franklin Financial, Morgan Stanley, Nomura Holdings, The Royal Bank of Scotland(RBS), and Societe Generale