The Federal Housing Finance Agency is going to file lawsuits against Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, alleging the banks misrepresented the quality of mortgage-backed securities they sold during the height of the housing bubble, The New York Times reports. This will be the second lawsuit filed against Bank of America. AIG announced in August they were suing Bank of America for $10 billion over misrepresented mortgage-backed securities. The lawsuits from the FHFA will either be filed on Friday or Tuesday, according to The Times's sources. Monday is a holiday. The banks allegedly "failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified." The FHFA oversees Fannie Mae and Freddie Mac, which lost $30 billion whenever the housing bubble burst in 2008. The majority of the loss was paid for by taxpayers.
The lawsuits have to be filed before Wednesday, on the third anniversary of the housing agencies' federal takeover, or it will be much harder to file claims against the companies. The two were compelled to buy the securities, all rated AAA by ratings agencies, because, "they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed." They also had benchmarks to meet when backing loans, "to low-to-moderate income and minority borrowers," and the mortgage-backed securities they purchased counted towards those benchmarks. The Times notes that in 2006, Fannie and Freddie were warned to stop buying so many mortgage-backed securities because its purchases had surpassed its risk management skills. If they were ever caught in an emergency situation, they wouldn't be able to handle the damage that followed.