The big banks are fielding a barrage of litigation and accusations for their part in the mortgage mess.
The latest salvo came from the Federal Housing Finance Agency, or FHFA, which oversees Fannie Mae and Freddie Mac. The regulator filed suit Friday against 17 major banks, including Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs. The banks are being charged with bundling and selling mortgage backed securities that they knew to be low quality and failing to do due diligence on borrowers who ultimately defaulted. The FHFA is seeking billions of dollars in compensation.
Bank stocks took a beating Friday, led by an 8 percent drop in Bank of America stock.
Fannie Mae and Freddie Mac, now owned by the government, lost more than $30 billion in failed securities and much of the tab was picked up by taxpayers. Since the government took over in 2008, taxpayers have paid $140 billion to keep the agencies afloat. The FHFA is seeking to recoup some of those costs, but bank representatives claim that all the legal action will further stymie the housing market. Some analysts are worried that a bloodletting of cash to settle the suits will further hurt the financial industry, or worse, require more government bailouts.
Five of the biggest financial institutions, Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup and Ally Financial are already under fire from all 50 state attorneys general seeking billions in settlement for various mortgage wrongdoing .
New York forces banks to clean up their act ahead of a sale
In a separate action last week, three financial firms have agreed to end practices that led to mishandling mortgage paperwork and "robo-signing" foreclosure documents without reviewing them. The agreement was made with New York financial services superintendent Benjamin Lawsky and Goldman Sachs Group, Goldman's Litton Loan Servicing business and Ocwen Financial Corp.
An article in the Wall Street Journal says the firms also agreed to reduce mortgage principal by 25 percent for 143 New York borrowers. Lawsky imposed these reforms as part of the conditions of Goldman's pending sale of Litton to Ocwen, which would become the 12th largest mortgage servicer in the nation after the sale, with 700,000 loans.
The flurry of litigation against banks will eventually be sorted out, and ultimately, many analysts believe the financial institutions will have to pay --it's just a question of how much.
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