Feds sue big banks over mortgage securities

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NEW YORK - The U.S. government has sued the nation's largest banks, along with a handful of other financial institutions and executives, for violating federal and state laws in the sale of home mortgage-backed securities.

The Federal Housing Finance Agency, which oversees mortgage buyers Fannie Mae and Freddie Mac, filed the lawsuit Friday seeking seeks compensation for more than $41 billion of losses related to subprime mortgage bonds. The suit could hamper a broader government mortgage settlement with banks, Reuters reports.

Among the 17 institutions targeted by the lawsuits were Bank of America Corp., its Merrill Lynch unit, Citigroup Inc., JP Morgan Chase & Co., Goldman Sachs, Barclays and Nomura.

Home mortgage-backed securities were risky investments whose collapse after the real-estate bust helped fuel the financial crisis that erupted in late 2008.

The government says the banks misrepresented the quality of the mortgage securities -- securities that were backed by subprime and other risky loans but were deemed safe investments by ratings agencies.

"Remember -- the mortgage game changed in the years leading up to the crash. Instead of lending people money to buy a house and holding on to the loan, banks acted as middlemen, selling those loans to investors. With no skin in the game, they stopped worrying about whether the borrower could actually afford to make the payments, or if the house was worth the price," analyst Dan Burrows writes at CBS Moneywatch.com.

"So of course those mortgage securities soured when the housing bubble burst. Investors who had bought the loans got creamed, including Fannie Mae and Freddie Mac, which suffered $30 billion in losses. That expense was almost entirely borne by taxpayers."

The lawsuits come as a result of past claims from the FHFA. Last year, the FHFA issued 64 subpoenas to various entities seeking documents related to mortgage-backed securities in which the Fannie and Freddie had invested.

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The agency said at the time the documents would enable it to determine whether the banks and other financial entities were liable for losses they had suffered from their investments. FHFA said it expected to recoup funds, which would be used to offset payments made by the U.S. Treasury to Fannie and Freddie.

Fannie Mae and Freddie Mac are viewed as critical to the mortgage market, because they buy mortgages loans and mortgage securities issued by the lenders.