Feds sue UBS over mortgage-backed securities
Thursday, July 28, 2011
WASHINGTON (AP) — The regulator of government-controlled mortgage buyers Fannie Mae and Freddie Mac is suing UBS AG in a bid to recoup more than $900 million in losses from mortgage-backed securities purchased from the banking giant during the housing boom.
The Federal Housing Finance Agency on Wednesday filed the lawsuit in U.S. District Court for the Southern District of New York against UBS Americas Inc., several other units of the Swiss bank and three former executives. It claims the defendants violated U.S. securities laws and seeks restitution of the two mortgage companies’ losses, plus interest.
Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default and sell them to investors around the world. The companies bought more than $4.5 billion in home loans pooled into securities from UBS between 2005 and 2007.
In the complaint, their regulator claims UBS left out or failed to correctly provide key information about the individuals who took out the loans Fannie and Freddie acquired.
Specifically, the FHFA asserts that the bank omitted or misstated details about borrowers’ creditworthiness, ability to pay back their mortgage and the underwriting practices used to evaluate and approve the loans.
“As a result of defendants’ misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated,” the FHFA claims in the lawsuit.
The agency cites a review of several hundred loan files that found numerous instances in which the bank failed to confirm borrowers’ stated income and debt — key factors in determining whether a borrower qualifies for a loan.
FHFA also claims that supporting documents on the mortgage-backed securities Fannie and Freddie bought from UBS exaggerated the percentage of properties where the borrower also lived in the home.
Fannie and Freddie calculate they have lost more than 20 percent of the more than $4.5 billion they invested buying mortgage-backed securities from UBS.
In a statement, UBS said it is reviewing the lawsuit and intends to defend itself vigorously in court.
FHFA issued 64 subpoenas last year related to the lawsuit, said Edward DeMarco, the agency’s acting director. He also said the agency would be taking further actions as it seeks redress for the losses suffered by Fannie and Freddie. In January, Bank of America Corp. paid $2.6 billion to settle claims that it sold poor-quality mortgage-backed securities to Fannie and Freddie.
Fannie Mae, based in Washington, D.C, and Freddie Mac, based in McLean, Va., own or guarantee about half of all mortgages in the U.S., or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.
During the housing boom, the companies backed many loans that had been approved without proof of the borrowers’ income or assets. That reversed years in which they backed only the safest loans — 30-year fixed-rate mortgages with 20 percent or higher down payments.
While Fannie and Freddie didn’t make subprime loans, they did buy securities tied to those risky mortgages. The companies had said they felt pressure to compete against Wall Street firms that were backing extremely risky loans.
The government rescued them from the brink of failure in September 2008 after they nearly toppled due to losses on risky mortgages. They have since tightened their lending standards.
The government has estimated that bailouts of the two companies will cost taxpayers up to $259 billion.
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