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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 9, 2011

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September 9, 2011 – After the housing market collapsed in 2008, many subprime mortgage-backed securities issued by U.S. financial firms became toxic, causing major losses for Fannie Mae and Freddie Mac. Taking action on Friday, Sept. 2, the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, filed a suit against 17 firms for alleged violations of federal securities laws and common law in sales of subprime mortgage-backed securities.

Among the 17 institutions facing these allegations are Bank of America Corporation, Citigroup, Inc., Goldman Sachs & Co. and JP Morgan Chase & Co. The suits indicate that the toxic securities Fannie Mae and Freddie Mac purchased from these entities totaled almost $200 billion in losses, although this number does not represent the amount of compensation the FHFA is seeking. It has not yet announced an amount for its compensation, saying that “actual recoveries will be determined based on filings by the parties, evidence and judicial findings.”

The FHFA argues that these institutions did not accurately present the characteristics of the mortgages backing these securities when they presented them to Fannie Mae and Freddie Mac. It said it “seeks compensatory damages for negligent misrepresentation,” such as misstating the owner occupancy percentage and loan-to-value ratio.

It claims these reports violated the Securities Act of 1933. More broadly, the FHFA filed these complaints it accordance with its authority under the Housing Economic Recovery Act of 2008.

In a statement issued on Sept. 6, the FHFA stated, “Some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings.”

In a statement responding to the lawsuit, Bank of America said that it did not portray false characteristics or misleading information to Fannie Mae and Freddie Mac about the securities. Fannie and Freddie, the statement said, “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.”

The lawsuits against these institutions were filed in federal and state courts in New York and in the federal court in Connecticut.  They follow a similar one against UBS Americas, Inc. on July 27, 2011.