FHFA Subpoenas Data from 64 Issuers of Mortgage Backed Securities
What’s this? The Federal Housing Finance Agency (“FHFA”) sent subpoenas to 64 issuers of mortgage-backed securities? The agency’s press release said that it’s trying to determine whether issuers are liable for Fannie’s and Freddie’s investment portfolio losses? The subpoenas are seeking loan level data, related to underwriting, performance, and servicing too?
Uh oh. Someone’s gonna’ be in big trouble… as in… Lucy, you got some ‘splainin’ to do. Is it warm in here all of a sudden?
The FHFA wouldn’t say specifically which companies would be receiving the subpoenas, but they didn’t have to… 64 issuers means just about everyone’s on the list.
Because of FHFA’s status as federal conservator, they can move much faster and get much further than the normal litigation process would allow by demanding documents outside of court, and as a result the subpoenas constitute a very real and significant threat to those served. For the multitude of investors looking to go after banks to recoup the untold losses that resulted from shoddy underwriting practices, what the government uncovers, depending on how its used, might just light the way.
Now, FHFA did say that the subpoenas are “a financial inquiry, not an investigation or a lawsuit,” but if I’m one of those that received a subpoena, I’ve got to be feeling like my shorts just shrank a couple of sizes for sure, because if the agency does attempt to force mortgage-backed securities back on their underwriters, the impact would be… I don’t know… how about, well… titanic? Pun most definitely intended.
FHFA’s acting director, Edward DeMarco, told Congress this past spring that the government sponsored enterprises, known as the GSEs, failed as a direct result of losses on RMBSs (residential mortgage-backed securities), although he also admitted that the two mortgage giants had problems beyond those created by their investment portfolios.
In a somewhat related story, Freddie and Fannie… oh, and Blockbuster… have all become hot penny stocks, trading on OTC. Some are waiting for them to get into the 5¢ to 10¢ range, which may or may not happen. Yesterday, Fannie was trading around 17¢, and threatening homeowners who walk away from their underwater mortgages on the grounds that it harms communities… LOL.
FHFA said that if it does move to recoup losses incurred by Fannie and Freddie, all recovered amounts would go towards Treasury’s ongoing GSE bailout, which is the monetary equivalent of what’s happened in the Gulf of Mexico. Ultimately, FHFA would have to establish that what Freddie and Fannie purchased contained collateral that was materially different than was described in the securities’ prospectuses. The subpoenas for loan level data may provide the foundation for such a claim.
But, what is most interesting, to me anyway…
FHFA specifically mentioning “servicing” in the subpoenas means that the agency could be looking to allege that mortgage servicers failed to pursue adequate loss mitigation efforts… or in other words, they chose not to modify loans even when doing so would have been in the best interests of the investors, which is required by Pooling & Servicing Agreements, or PSAs for short. PSAs are contracts between investors and mortgage servicers.
Admittedly, it won’t be easy. FHFA will have to untangle the losses resulting from the drop in housing prices from those created by inadequate underwriting, but lawyers familiar with the situation have said that if anyone can do it, it would have to be a government agency, which they say has leverage that a private investor wouldn’t have.
Uh oh. Who knows where it will all end up, but I’m just going to smile through my day, knowing that there are more than a few bankers today who are unquestionably feeling just a little less smug then they were yesterday.
Like I keep telling you guys… this isn’t over yet. My government may be slow, and often appear incompetent, but they’re capable of being unbelievably annoying, especially to bad guys.
I’ll be following along to see where this goes. So, please stay tuned… Same bat-time… same bat-channel.