FHLB Chicago Sues Sellers Of Faulty MBS

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CHICAGO — Federal Home Loan Bank of Chicago has filed suit against lenders including Bank of America Corp. claiming their failure to disclose relaxed subprime mortgage underwriting standards, led it to unknowingly buy risky private-label mortgage-backed securities for which it wracked up hundreds of millions of dollars in losses.

Bank of America and the other defendant commercial banks, including Citigroup, Goldman Sachs and Wells Fargo, sold it more than $3.3 billion in residential mortgage-backed securities, according to the suit, filed in state court.

The allegations are similar to those made by the FHLB San Francisco and Seattle, which also realized large losses on private label MBS.

"The defendants did not tell the bank the truth about the loans that comprised the mortgage pools," underlying the securities, the Chicago Bank charge din its suit.. While it believed it was acquiring "safe" securities, "in fact the bank purchased a toxic stew of doomed mortgage loans," according to the complaint.

The FHLB Chicago, claiming mortgage originators abandoned good underwriting and appraisal standards and engaged in predatory lending, is seeking a court order voiding its purchase of the securities and directing the defendants to repay it their value plus 10% annual interest.

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