Report: U.S. To Sue Big Banks Over Mortgages

The Federal Housing Finance Agency is reportedly preparing federal court lawsuits against major banks for the way in which they sold mortgage-backed securities, whose imploding value triggered the 2008 credit crisis.

The New York Times quotes three persons familiar with the cases as saying the suits seek to hold the banks accountable for a lack of due diligence, in which they failed to discover that the mortgages were issue to individuals who lacked the ability to pay them.

Several large banks already face civil lawsuits from individual investors, who are trying to force the institutions to buy back the securities, which in many cases have lost most of their market value. The reported suits by the government seeks reimbursement for losses suffered by Fannie Mae and Freddie Mac.

A number of states have already begun pursuing accountability for the huge losses in the mortgage-backed securities market. In 2010, the state of Oregon sued former financial giant Bear Stearns & Co. to recover losses that were directly attributable to misleading filings in connection with mortgage-backed securities. The suit charged that Bear Stearns, as a significant issuer and underwriter, resold such securities to investors such as the Oregon Public Employees Retirement Fund (OPERF).

Vastly exaggerated

When securities sold in 2006 and 2007 were found to be vastly exaggerated in value and quality - in some cases, they were worth only 10 percent of the reported value - investors lost substantial money. The proliferation of such overvalued securities helped to trigger the devastating market collapse of 2008.

Banks, of course, are also under pressure for their handling of foreclosures. Fifty state attorneys general are finalizing a settlement with major banks, related to the use of “robo-signers” to process thousands of foreclosure documents, in violation of state laws.

At last report, the states were still trying to agree on the scope of the settlement, and how far it should go in rectifying the wrongs committed in the foreclosure process.