FEDERAL HOUSING FINANCE AGENCY
For Immediate Release Contact: Corinne Russell (202) 414-6921
September 6, 2011 Stefanie Johnson (202) 414-6376
Federal Housing Finance Agency Statement on
Recent Lawsuits Filed
Upon review of media coverage of the lawsuits FHFA filed on Friday, September 2, FHFA is
providing this statement to clarify certain matters pertaining to these suits and to provide a
fuller statement of purpose for these filings.
FHFA has a statutory responsibility as conservator of Fannie Mae and Freddie Mac (the
Enterprises) to “take such action as may be necessary to put the regulated entity in a sound and
solvent condition and appropriate to carry on the business of the regulated entity and preserve
and conserve the assets and property of the regulated entity (12 USC 4617((2)(.” As FHFA
has noted on numerous occasions, with taxpayers providing the capital supporting the
Enterprises’ operations, this “preserve and conserve” mandate directs us to minimize losses on
behalf of taxpayers.
FHFA’s news release announcing the 17 suits described the purpose of these filings in the
“As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and
conserving these companies’ assets and does so on behalf of taxpayers. The complaints
filed today reflect FHFA’s conclusion that some portion of the losses that Fannie Mae
and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are
attributable to misrepresentations and other improper actions by the firms and
individuals named in these filings. Based on our 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 Enterprises for those securities.
“FHFA filed the complaints under the broad authority granted to it by the Housing and
Economic Recovery Act of 2008. The U.S. legal system provides for addressing such
alleged misrepresentations through the nation’s securities laws and traditional common
law. FHFA is following those legal remedies in filing these complaints and seeks to
recover on losses to the Enterprises that are the legal responsibilities of others.”
In the several years prior to conservatorship, each Enterprise bought hundreds of billions of
dollars in PLS packaged and sold by large financial institutions. To be clear, Fannie Mae and
Freddie Mac were investors in these PLS, not the originators of those securities.
The mortgages backing the PLS sold to the Enterprises were often a part of a larger pool of
mortgages and the securities sold to the Enterprises were often customized for their purchase
because of the conforming loan requirements of their charters. Like other PLS investors,
the Enterprises did not have access to the loans underlying these securities and each Enterprise
ultimately relied upon the security issuer to accurately describe the mortgages backing the
security in the marketing and sales materials, as required under federal securities laws.
At the heart of the suits is FHFA’s conclusion that the actual mortgages backing many of the
securities had characteristics that differed in a material way from what had been represented in
securities filings. Under the securities laws at issue here, it does not matter how “big” or
“sophisticated” a security purchaser is, the seller has a legal responsibility to accurately
represent the characteristics of the loans backing the securities being sold.
The nation’s financial system cannot function if sellers of securities fail to fulfill this legal
responsibility. Our laws provide legal remedies through challenges such as the ones FHFA has
brought. FHFA has consistently made clear its intention to seek recoveries on losses that are
the legal responsibility of others and FHFA has sought remedies short of filing formal legal
complaints. Now, however, FHFA has taken this action to carry out its legal responsibility as
conservator. Any recoveries resulting from these efforts will reduce taxpayers’ ultimate losses
from the Enterprises’ financial difficulties.
Another important clarification regarding these suits is in order. FHFA has not filed suit
against every issuer, nor on every PLS purchased by the Enterprises. FHFA has filed suit where
it believes it has evidence of violations substantial enough to warrant such remedies. FHFA
seeks recoveries for losses associated with securities laws violations and other improper actions
set forth in the complaints. Actual recoveries will be determined based on filings by
the parties, evidence and judicial findings. At this time, it would be premature and
potentially misleading to estimate the size of any potential recoveries. However, press reports
that FHFA is seeking nearly $200 billion in damages or recoveries are excessive; such numbers
reflect the original amount of such securities purchased, not the losses incurred or the potential
recoveries at the end of this process. In particular, use of original unpaid principal balance as a
measure of potential recoveries is incorrect as it does not equate with the losses incurred and it
does not reflect the repayments of principal that have already occurred or the remaining value
of the securities.
Some have claimed that these suits will disrupt economic recovery, or endanger the targeted
banks, or increase their cost of capital. While everyone is concerned with these important
issues, the long-term stability and resilience of the nation’s financial system depends on
investors being able to trust that the securities sold in this country adhere to applicable laws.
We cannot overlook compliance with such requirements during periods of economic difficulty
as they form the foundation for our nation’s financial system. Therefore, through these
lawsuits, FHFA turns to the courts to adjudicate the violations that it has alleged in its
Finally, these suits are unrelated to the ongoing investigations by the state attorneys general.
While FHFA cannot speak for the attorneys general, the focus of their efforts has been the
alleged failures of mortgage servicers to follow state law, particularly as it related to foreclosure
processing. While those investigations cover servicing of loans that may be in the securities
identified in FHFA suits, these are quite different matters. FHFA is pursuing claims pertaining
to the disclosures in securities filings whereas the attorneys general are focused on foreclosure
processing of delinquent mortgages. Each is a valid but separate concern, leading to separate
and distinct claims for recompense.