The Federal Housing Finance Agency, which has served as the conservator of Fannie Mae and Freddie Mac since 2008, is looking to recoup on serious losses that the government sponsored entities have suffered as a result of their heavy purchases of mortgage-backed securities during the hey days of the real estate bubble. The FHFA has hired Quinn Emanuel Urquhart & Sullivan LLP, a large law firm out of L.A. and has issued sixty-five subpoenas to various banks. The probe is focused on private-label securities that were originated by mortgage companies, packaged by Wall Street firms, and then sold to investors. This has the potential to throw open the floodgates of litigation against originators of loans who securitized these loans and sold them to investors like Fannie Mae and Freddie Mac.
With the financial backing of the US government and a large LA law firm set to push forward, the stage is set for a serious inquiry into the originating and securitization practices of many institutions. Quoting Joshua Rosner of Graham Fischer & Co, the Wall Street Journal recently reported if the FHFA is successful in proving that loan files didn’t meet underwriting standards or that their ownership chain wasn’t properly transferred during the securitization process, that could pave the way for other investors to make similar challenges.
Fannie and Freddie were two of the largest investors in mortgage backed securities during the height of the real estate bubble. "Those securities were often backed by subprime loans and mortgages that required little or no documentation of borrower incomes, which deteriorated sharply once home prices fell." Indeed, Fannie and Freddie purchased $227 billion of bonds backed by subprime and other risky loans in 2006 and 2007.
In the end, they paid the price for trying to keep pace with the returns that investment banks and retail banks were making, all of which led to the financial crisis in 2008. Once again, the US taxpayer is on the hook for those losses, which the FHFA is now trying to recoup. However, some analysts are saying that FHFA is going to have a hard time proving that Fannie and Freddie, which "touted their unparalleled mortgage-market expertise," didn’t know what they were buying. Either way, the new associates at Quinn Emanuel are going to have plenty to do in meeting their 2000+ hour billable requirement and the US taxpayer paying dearly for those new associates.