At face value, the lawsuit makes sense; the role of the FHFA is to limit losses to Fannie and Freddie. The two have taken about $33 billion in losses from mortgage backed securities they bought from the big banks. They claim the big banks misrepresented the loans in the securities, that said loans were poorly underwritten, using inflated or falsified borrower incomes. Fannie and Freddie were the largest buyers of private label mortgage-backed securities from 2004 to 2007.
I'm not going to argue the merits of the suit, like what Fannie and Freddie's role was in checking these securities they were buying, given that they played a big part in crafting and choosing them. Others will surely do that ad nauseum. What's more important to me is how this and the growing ocean of litigation affect the housing recovery.
Now you have a government lawsuit hitting the big banks, just as the government, in the form of the justice department, is trying to negotiate a big bank settlement with the fifty state attorneys general over so-called "robo-signing" foreclosure practices. That one allegedly has a $20 billion price-tag, but recent drama over whether to include securitization issues in the settlement, threatens to derail a big chunk of that and open the banks up to more litigation. How ironic.
If you're a big bank, facing sizeable payment for your past sins (or as in the case of Bank of America, sins of companies you bought, like Countrywide Financial), what do you do now? You likely make loans more expensive and harder to get, or you get out altogether. This week Bank of America dropped its correspondent lending business, a huge blow to that market. Bottom line, it hits housing.
