On September 2, FHFA filed lawsuits against JP Morgan Chase, Bank of America, 15 other banks, and 132 individuals.
The lawsuits, filed in the U.S. District Court for the Southern District of New York and a federal court in Connecticut, are civil suits requesting a jury trial. The plaintiffs seek a monetary judgment, although there are many in the real estate industry who would prefer to see criminal charges.
The subject of these lawsuits is alleged violations regarding the sale of residential mortgage-backed securities sold to the GSEs – Fannie Mae and Freddie Mac.
We find it interesting that at one time the Federal Government was urging banks to loosen their loan requirements so that “All Americans” could own a home. The banks did so, and placed thousands of families and individuals in homes with little to no down payment and low “teaser” interest rates that almost guaranteed failure when the loans re-set to normal interest rates.
Next, when the loans began to fail, the government declared the banks “too big to fail” and handed over bail-out money to keep them afloat.
Now those same banks are being sued. Why?
The reason given is their failure to follow underwriting guidelines with regard to the loan to value ratio of homes being financed, the occupancy stipulations, and the borrower’s ability to repay.
However, it also appears that these banks didn’t want investors to know the quality of the loans they were selling. According to charts published on the Mortgage News Daily website, the banks misrepresented the loans included in the packages they sold. Thus, the lawsuits allege fraud.
For instance, a look at 5 packages sold by Bank of America shows a gross misstatement of the number of loans with a loan to value ratio of over 100%. While they call it misrepresentation or carelessness – it seems difficult to “accidentally” enter “zero” when the actual number is anywhere from 14% to 20%. They also misrepresented the percentage of loans with a less than 80% loan to value. Since those are the loans that don’t carry mortgage insurance, wouldn’t it be easy to correctly calculate their numbers?
It will be interesting to track the results of these lawsuits. It will be more interesting to see what effect they might have on borrowers coming into the market, needing new mortgage loans. Let’s hope this doesn’t cause yet another problem for the housing industry.
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