U.S. issues subpoenas on Wall Street's mortgage bonds
NEW YORK (Reuters) - The regulator of Fannie Mae and Freddie Mac said on Monday it is seeking to determine if issuers of private mortgage bonds are liable for losses suffered by the two U.S.-backed housing finance giants.
The Federal Housing Finance Agency said in a statement it issued 64 subpoenas to "various entities" asking for documents on the mortgage securities assembled outside the government-related home finance system.
Fannie Mae and Freddie Mac, the largest providers of funding for U.S. home loans, ramped up buying of so-called private-label mortgage-backed securities offered by Wall Street at the peak of the housing boom. The securities, including subprime mortgage bonds, represented some of the worst lending standards and helped trigger the credit crisis.
The deterioration in the credit of subprime and other private mortgage bonds was key to Fannie Mae's and Freddie Mac's rapid downfall in 2008, leading their regulator to seize control that September. Since then, the U.S. Treasury has injected more than $145 billion to keep the companies afloat, and they have warned that more will be needed.
If liability is determined, the FHFA said it expects to recoup funds and use them to offset the taxpayer funding.
The FHFA said it stepped in because Fannie Mae and Freddie Mac have found it difficult to obtain loan documents in their own investigations of possible misrepresentations or breaches of warranties. Private mortgage bonds became a significant portion of the companies' investments as Wall Street banks took market share away from the traditional guaranteed securities that Fannie Mae and Freddie Mac issued and bought.
"It's a shame Fannie and Freddie didn't ask these questions themselves when they were buying these securities in the first place," said Howard Glaser, principal of Washington consultants Glaser Group and former adviser to the U.S. Department of Housing and Urban Development.
"Everyone passed the responsibility for evaluating the risk onto someone else, so at the end of the day, no one really knew what was in these loan pools," Glaser said in an e-mail.
Freddie Mac and Fannie Mae have pared their holdings of the securities. But their balances still stood at $97.4 billion and $44.3 billion, respectively, as of March.
Fannie Mae and Freddie Mac spokesmen directed requests for comment to the FHFA. The FHFA had no additional comment.
Names of subpoenaed parties were not released, but top Wall Street banks were among the big private mortgage bond issuers. The FHFA said it would be premature to speculate on how the documents would be used, including in potential lawsuits.
Morgan Stanley, Goldman Sachs Group Inc and about 10 others were recently sued by hedge fund Cambridge Place Investment Management, which seeks to recoup $1.2 billion it lost on subprime mortgages.
Previously, the Federal Home Loan Bank of San Francisco, which is regulated by the FHFA, sued nine Wall Street banks to rescind $19 billion in mortgage bonds. The Seattle FHLB has also sued over $4 billion of the bonds.
Fannie Mae and Freddie Mac have already started recouping billions of dollars from lenders on loans that did not meet underwriting guidelines for "agency" mortgage-backed securities issued by the two government-controlled companies.
(Editing by Dan Grebler)