Big Banks Sued Over Risky Mortgages

Copyright © 2011 National Public Radio®. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

SCOTT SIMON, host: A federal regulator has filed a lawsuit against 17 financial firms - some of them the biggest names on Wall Street. The suit alleges misrepresentation and negligence in the sale of mortgage securities. NPR's Chris Arnold reports.

CHRIS ARNOLD: Bank of America, JP Morgan Chase, Goldman Sachs and others are being sued essentially for selling bad mortgages. The Federal Housing Finance Agency is suing on behalf of the government-backed firms Fannie Mae and Freddie Mac, who bought the mortgages. Guy Cecala is the publisher of Inside Mortgage Finance.

GUY CECALA: This lawsuit is an attempt to recoup some of the losses Fannie Mae and Freddie Mac suffered from investing very heavily in subprime loans.

ARNOLD: So this basically investors, in this case Fannie Mae and Freddie Mac, go to the major banks and say, hey, look you, sold us this stuff, you said it was AAA, you said it was great and look, it was garbage and we lost billions of dollars.

CECALA: Exactly.

ARNOLD: Investors have filed many similar lawsuits before, but Fannie and Freddie bought a ton of bad loans, so Cecala says the liability could potentially be huge.

CECALA: It's probably somewhere in the neighborhood of thirty to fifty billion dollars. That is enough to break a number of these financial institutions in there.

ARNOLD: But, Cecala says the lawsuit could be a tough one to prove. Fannie and Freddie were certainly experienced investors, who the banks could argue should have known exactly what they were buying, and that the companies decided to take the risk of buying up all these subprime loans.

CECALA: Fannie Mae and Freddie Mac, again, very sophisticated investors in many cases were able to underwrite and look at each loan going into the securities they were buying, so it's hard to make that case that they were duped.

ARNOLD: Cecala says it's hard to estimate how substantial any settlement might be. Chris Arnold, NPR News.

SIMON: You're listening to NPR News.

Copyright © 2011 National Public Radio®. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to National Public Radio. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.