The Grand Legal Mortgage Morass

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If there’s one takeaway from the news that the Federal Housing Finance Agency will sue a dozen big banks for peddling disastrously overvalued mortgage-backed securities in the the run-up to the financial crisis, it’s that the handful of major suits brought against Wall Street since 2008 have never been further from resolution.

The FHFA, which oversees federally-backed mortgage giants Fannie Mae and Freddie Mac, is essentially seeking to recoup billions in losses absorbed by the now government sponsored entities when the housing market went bust, arguing that investment banks knowingly misled Fan and Fred when they sold them gilded packages of bad loans. In many ways mortgage securitization is the scandal at the root of the financial crisis — and the area in which crusaders like New York Attorney General Eric Schneiderman hope to bring future complaints — but there are other considerations. The housing market is still in terrible shape, the Obama administration’s efforts to stanch the bleeding have largely failed, and 50 state attorneys general are in the middle of negotiating a potentially massive settlement with the banks over rampant foreclosure fraud. These pieces don’t move independently of one another.

In order to get banks to provide mortgage relief, state negotiators may offer them immunity from future prosecution as part of the foreclosure fraud settlement. Exactly what that immunity would cover isn’t clear: The Obama administration argues it wouldn’t preclude securitization suits, but Schneiderman broke publicly with other negotiators over just this issue last week. Either way, the announcement of a new major suit over securitization will undoubtedly muddle the foreclosure settlement talks, and, likely to the chagrin of some at Treasury and the Department of Housing and Urban Development, make them more difficult to resolve anytime soon.

The FHFA’s new challenge is hardly a slam dunk either. It filed a similar suit against UBS in July and, according to the Times, those negotiations “have yielded little progress.” In reality, the agency’s latest move may be one of sheer necessity. It’s been almost three years since the government put Fannie and Freddie into conservatorship and the statute of limitations expires next week.

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