Friday, September 02, 2011

GSE Conservator Alleges Securities Law Violations Against Financial Institutions Selling Mortgage-Backed Securities

The Federal Housing Finance Agency, conservator for Fannie Mae and Freddie Mac, filed lawsuits in state and federal court against 17 financial institutions, their officers and various unaffiliated lead underwriters alleging violations of federal securities laws and common law in the sale of residential private mortgage-backed securities to Fannie and Freddie. The complaints, filed in federal or state court in New York or the federal court in Connecticut, seek damages and civil penalties under the Securities Act. In addition, each complaint seeks compensatory damages for negligent misrepresentation. Certain complaints also allege state securities law violations or common law fraud. FHFA filed the complaints under the broad authority granted to it by the Housing and Economic Recovery Act of 2008.

The complaints reflect FHFA’s conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private mortgage-backed securities are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings. Based its review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Fannie and Freddie for those securities.

Residential mortgage-backed securities are backed by the underlying mortgage loans. Residential mortgage-backed securities are issued pursuant to registration statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus, and the prospectus supplement. Underwriters sell the certificates to investors.