WASHINGTON — The Federal Housing Finance Agency aggressively pushed back Tuesday against claims that Fannie Mae and Freddie Mac were sophisticated investors that should have done a better job of vetting their purchases of mortgage-backed securities.
In a statement, the agency said it did not matter how sophisticated the government-sponsored enterprises were, the banks selling such securities did not accurately represent them.
"Under the securities laws at issue here, it does not matter how 'big' or 'sophisticated' a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold," the agency's statement said. "The nation's financial system cannot function if sellers of securities fail to fulfill this legal responsibility."
The FHFA filed suit last week against 17 large financial institutions, accusing them of misrepresenting the quality of mortgages they sold to Fannie and Freddie. The FHFA, which since September 2008 has been responsible for conserving the assets of Fannie and Freddie, also stated that the two mortgage giants did not have access to the mortgage loans underlying the securities they purchased.
The agency claimed that Fannie and Freddie "ultimately relied upon the security issuer to accurately describe the mortgages backing the security in the marketing and sales materials, as required under federal securities laws."
Since the lawsuits were filed on Friday, the outlines of a defense by banks have begun to emerge in press reports. The Wall Street Journal quoted Andrew Sandler, a lawyer who represents banks in regulatory enforcement actions, as saying: "It will become clear that the plaintiffs knew as much as the defendants about the quality of these loan portfolios."
In its statement Tuesday, the FHFA also took issue with arguments that its lawsuits will disrupt economic recovery, or endanger the defendant banks.
"While everyone is concerned with these important issues, the long-term stability and resilience of the nation's financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during period of economic difficult as they form the foundation of our nation's financial system," the agency said.
The lawsuits involve nearly $200 billion in private-label mortgage backed securities that Fannie and Freddie bought from the banks from 2005 to 2008. The institutions being sued include Bank of America, JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley, as well as a number of large European banks. Wells Fargo is not among the banks being sued.
The agency noted Tuesday that it did not sue every firm that issued private-label securities purchased by Fannie and Freddie. "FHFA has filed suit where it believes it has evidence of violations substantial enough to warrant such remedies," the statement said.
