The FHFA is Targeting These Big Banks for Mortgage Fraud

Over a dozen major U.S. banks (NYSE:KBE) are expected to be named in a Federal Housing Finance Agency lawsuit arguing that they misrepresented the quality of mortgage securities they packaged and sold leading up to the housing market collapse. The FHFA, which oversees mortgage firms Fannie Mae and Freddie Mac, is expected to file the lawsuit in federal court Friday or Tuesday, and is expected to seek billions of dollars in compensation, according to a published report.

Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), and Deutsche Bank AG (NYSE:DB) are among the banks said to be targeted by the suit. The FHFA will argue the banks failed to meet their due-diligence duties under securities law in failing to recognize overstated or falsified borrower incomes on mortgage applications. Because so many borrowers were unable to make their payments, mortgage-backed securities that had been sold to investors quickly lost their value.

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While many mortgage-backed securities investigations and lawsuits have been filed against the nation’s major banks on behalf of private investors, the FHFA suit seeks reimbursement for losses incurred by Fannie Mae and Freddie Mac. When suing UBS (NYSE:UBS) over $4.5 billion of mortgages in July, the FHFA said it was considering such a lawsuit.

The news has global markets trading lower, with losses led by the banks said to be named in the suit. “The U.S. banking sector has already suffered a massive loss of confidence and remains incredibly fragile,” said Kathleen Brooks, research director at Forex.com. “This lawsuit and the massive sums involved may aggravate the problem and cause another leg lower in the financial sector.”

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