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Why the U.S. may sue banks over sour mortgages

Marketplace Staff Sep 2, 2011

Why the U.S. may sue banks over sour mortgages

Marketplace Staff Sep 2, 2011

Steve Chiotakis: We could be seeing lawsuits coming down from the federal government in the coming days. The government’s accusing big banks of selling mortgages to government-backed mortgage giants Fannie Mae and Freddie Mac that were less favorable than advertised. The story is in today’s New York Times and Nelson Schwartz is the reporter on that story. He’s with us now. Good morning.

Nelson Schwartz: Hi. How are you?

Chiotakis: Doing well. There are so many issues with the housing crisis and with subprime mortgages, what are these lawsuits about?

Schwartz: Among the big losers in the mortgage meltdown were Fannie Mae and Freddie Mac, the housing mortgage giants that are controlled by the U.S. government and therefore taxpayers lost. They’re filing suit against the big Wall Street banks to recoup some of those losses.

Chiotakis: It’s been what, almost three years since the federal bailout of Fannie and Freddie. Why are they doing this right now?

Schwartz: The regulators are concerned that there is a three-year statute of limitations and from when Fannie and Freddie were taken over. And that anniversary is Wednesday.

Chiotakis: How are the banks, do you think, likely to respond?

Schwartz: The banks are saying that these were sophisticated investors who knew the risks and knew these securities were not guaranteed. As well as the argument they’re going to put forward is that the problems were caused by a broader downturn in the economy and broader problems in the housing market, not any fraud or misrepresentation on the part of the banks.

Chiotakis: I’m curious, Nelson, say Fannie and Freddie do win these suits — could that help the housing market?

Schwartz: Hard to say whether it would help the housing market itself. I think it would help the taxpayers, but the housing market is really looking at a big overhang from all those foreclosed homes.

Chiotakis: What about the banks? What would happen to the banks if they take this hit, billions of dollars?

Schwartz: I think it would be a hit to their earnings. I think it would sort of confirm investor fears that they’re going to be paying out billions of dollars for years because of what transpired during the housing bubble.

Chiotakis: New York Times reporter Nelson Schwartz. Nelson, thanks.

Schwartz: Thank you.

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