When news of the impending lawsuits broke, the industry was all abuzz, but those weâ€™ve spoken with say it shouldnâ€™t have come as a surprise.
The complaints seek damages and civil penalties. Based on initial reports,Â FHFAÂ is looking to recoup between $30 billion and $45 billion hemorrhaged from the GSEsâ€™ pockets after they bought securities issued between 2005 and 2007, which were made up of loans that later went into default.
â€œThe last thing a regulatory body wants to be accused of is, â€˜you should have taken some action and you didnâ€™t.â€™â€ Dâ€™Vari says.
The complaints, filed Friday after the markets closed, stem from an investigation launched last year byÂ FHFA, in
which the agency issued 64 subpoenas to obtain information about deals with the two GSEs.
The first lawsuit to result from that investigation wasÂ filed in late JulyÂ againstÂ UBSÂ Americas, Inc. Edward DeMarco, FHFAâ€™s acting director, warned at that time there would be â€œfurther actions to come.â€
Jack Konyk is executive director of government affairs with the law firmÂ Weiner Brodsky Sidman Kider PC. He says there are two sides to this coin and both have legs to stand on, which means a court may be the best place for the scene thatâ€™s about to play out.
With Fannie and Freddie bleeding green for some time now, Konyk saysÂ FHFAÂ is in a political position where they have to do something. As conservator, the agencyâ€™s primary responsibility is to protect the GSEsâ€™ assets and promote financial soundness.
On the other hand, Konyk points out that â€œitâ€™s awfully easy to apply hindsightâ€ when you have the benefit of knowing the bond issuers were off the mark in their assessments years earlier.
The problem in this circumstance, he says, is there are other mitigating factors that likely played a role in loan deterioration, including a historic economic downturn, rampant unemployment, and regressive conditions in the housing market.
Knoyk asks, to what degree can the federal agency expect, and then lay legal liability on, the ability of these financial firms to gauge the economic future correctly?
Gene Kirsch, senior financial analyst atÂ Weiss RatingsÂ says he finds it â€œironicâ€ that after bailing out these institutions, the government would then turn around and sue the very companies they rescued.
He says weâ€™re back to the same uneasy feeling of 2008 and 2009, where the overhang of bad mortgages is threatening the viability of these same institutions.
For the most part, though, Kirsch says the banks have some sort of contingency strategy for this situation, having set aside reserves for loan losses and possible litigation.
According to Kirsch, this will likely go the way most litigation does and end in a settlement, probably â€œsignificantly southâ€ of the $45 billion figure at the upper end of initial estimates.
A more long-lasting impact may come in the form of higher mortgage costs for consumers, Konyk says.
Such a strong-arm action by the regulator of the nationâ€™s two largest mortgage financiers could potentially change behavior in terms of underwriting, rating, and selling mortgage-backed securities, according to Konyk, especially if financial institutions feel they have to be able to judge future performance based on unforeseen conditions.
The extra risk that comes with such assessments and the liability for getting it wrong, Konyk explained, will be priced in and people will have to start paying more for mortgages.
The legal complaints filed byÂ FHFAÂ against each of the 17 firm scan be accessed online.