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Could mortgage lawsuits against banks weaken the economy?

The shadow of a house key falls over a mortgage application form.

Jeremy Hobson: The federal government is on the verge of filing lawsuits against the nation's biggest banks. The New York Times reports this morning that the suits will accuse the banks of selling bad mortgages during the housing boom and saying they were top quality. The government mortgage companies Fannie Mae and Freddie Mac suffered losses of more than $30 billion. For more on this, let's bring in Eliot Spoon. He teaches mortgage finance at the Michigan State University Law School. He's with us from East Lansing. Good morning.

Eliot Spoon: Good morning.

Hobson: Do you think that this is a winning argument for the federal government?

Spoon: I think this it is a good argument for the federal government, but it is not a slam-dunk lawsuit that they can win. There are a number of obstacles that lay before them.

Hobson: What do you think the banks are going to say?

Spoon: I think the banks are going to say 'number one, we didn't make any material misstatements. Two, that we didn't know about the misstatements because they came from the mortgage originators. And three, Fannie Mae and Freddie Mac, you're big sophisticated investors, you know this business better than we do. You have to rely on your own expertise when making these kinds of investments.'

Hobson: Is this really about recouping losses or is this about assigning blame for the mortgage mess that led us into this recession?

Spoon: I think it's about both. I think that any time one of these lawsuits are brought, one party's essentially trying to say 'I was innocent, I was just acting in the ordinary course of business.' So in that sense it's about one party saying I'm not to blame and the other party is. But it also -- as a necessary consequence -- has to allocate the losses. In this case, Fannie Mae and Freddie Mac have already been supported by the taxpayer, upwards of $150 billion, so if they win this suit, it will soften the blow for the

Hobson: If the federal government wins this case down the road -- however long it takes -- and the banks have to cough up another $30 billion, doesn't that then put the financial system in a weakened position and therefore weaken the entire economy?

Spoon: I think there's something to that. I think that one of the unintended consequences is that if these kinds of suits prevail -- Fannie Mae and Freddie Mac are not the only parties that are bringing these types of suits against the banks -- in this case it might help the taxpayer in the short run by lessening the amount we have to fund Fannie Mae and Freddie Mac, but if it ultimately weakens seriously major banks, taxpayers are going to have to give the money right back.

Hobson: Eliot Spoon teaches mortgage finance at Michigan State University Law School. Thanks so much for joining us.

Spoon: My pleasure.

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