The Federal Housing Finance Agency – which oversees mortgage giants Fannie Mae and Freddie Mac – blames the banks for failing to perform adequate checks on the quality of mortgage securities they sold on to investors before the financial crisis in 2008.
Fannie Mae and Freddie Mac lost more than $30bn (£18.5bn), partly because of the deals, and had to be bailed out by the government. The Federal Housing Finance Agency will argue that the banks should have known the securities were not sound.
Bank of America, JPMorgan Chase, Deutsche Bank and Goldman Sachs are to face action, the New York Times quotes sources as saying.
The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.
The agency filed suit against UBS in July, seeking to recover at least $900 million for taxpayers, and the individuals told the Times the new suits would be similar in scope.
The practice of subprime lending, wherein mortgage brokers lowered their standards to entice homebuyers to take out large mortgages to buy more expensive homes than they could afford, was a root cause of the mortgage market implosion.
Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.
The Times said Bank of America, JP Morgan and Goldman Sachs all declined comment. A Deutsche Bank spokesman told the Times, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”
Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.
The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.
“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.
While the banks put together tens of billions of dollars in mortgage securities backed by risky loans, the Federal Housing Finance Agency is not seeking the total amount in compensation because some of the mortgages are still good and the investments still carry some value. In the UBS suit, the agency said it owned $4.5 billion worth of mortgages, with losses totaling $900 million. Negotiations between the agency and UBS have yielded little progress.
News of the suit could have a negative impact on stocks of the banks in question on Friday. JPMorgan Chase, Bank of America and Goldman Sachs are traded on the New York Stock Exchange, while Deutsche Bank is traded on the German exchange.