Mortgage Showdown: FHLB Versus Securities Dealers

The escalating crisis over flawed foreclosures took a new turn Friday, when the attorney representing the Federal Home Loan Bank, David Grais, told CNBC, “We don’t have to say there was fraud. All we have to say is that the disclosures about these loans and the representationsthat were made to the securitization trustees were inaccurate.”


Grais is lead counsel for the FHLB, which is in litigation against eleven securities dealers over mortgage loan pools that were createdto fuel the boom in mortgage-backed securities market in 2005, 2006 and 2007.

“The way we know that so many of these loans didn’t comply is that in our security cases we actually purchased data on 750,000 loans made by about 30 different originators—in about half of the loans we find there are material inaccuracies in the disclosure,” Grais told CNBC’s “The Strategy Session".

As this multi-trillion dollar issue bubbles to the surface, many bank stocksare taking a hit. Many are wondering if it’s proven that false statements were made about those loans, how many mortgages would the banks be forced to repurchase at par?

“The CEO’s of both Bank of America and JP Morgan Chase have made it clear that their strategy is to fight these cases loan by loan, a war of attrition. They have the resources. They know that time is on their side," he said.

“Our clients are always willing to negotiate, there hasn’t been any reciprocal interest on the part of the banks, probably because the cases are in early stages," Grais said.

"In respect to BofA in particular, the biggest question is whether it will successfully ring-fence Countrywide. Countrywide liabilities have been estimated at 70 billion and if those liabilities are saddled on BAC (Bank of America) then it obviously has a very big problem," he concluded.

On Friday afternoon, lawyers in Los Angeles announced former Countrywide CEO Angelo Mozilo and two others agreed to settle civil fraud and insider trading charges with SEC related to mortgage loans. As part of the settlement, Mozilo will pay $67.5 million.