US bank stocks plunge on report of mortgage lawsuits

Bank of America shares plummeted 6.5
percent by midday on news of lawsuits over mortgages
© AFP/Getty Images/File Justin Sullivan

AFP

NEW YORK (AFP) – US financial stocks plunged on Friday after a newspaper reported that the government would sue more than a dozen big banks over mortgage-backed securities that imploded in the 2008 financial crisis.

Bank of America plummeted 6.5 percent by midday, while JPMorgan Chase was down 3.6 percent and Goldman Sachs was down 4.7 percent.

All three banks were named in The New York Times’ report that the Federal Housing Finance Agency was about to file the lawsuits to demand compensation for tens of billions of dollars in losses that were borne by US taxpayers.

The drop in banking stocks outpaced losses in the broader stock market driven by a disappointing report on US unemployment, with the Dow Jones Industrial Average down 1.4 percent.

“A report in The New York Times has sent banking stocks spiraling lower,” said Andrea Kramer, an analyst with Schaeffer’s Investment Research.

The Times, citing three unnamed individuals briefed on the matter, reported that the FHFA lawsuits were to be filed Friday or early next week against Bank of America, JPMorgan Chase, Goldman Sachs, Deutsche Bank and others.

The lawsuits would accuse the banks of bundling toxic mortgages — held by borrowers with inflated or falsified incomes — as securities and marketing them to investors, according to the Times.

When the borrowers failed to pay their bills, the securities lost value, contributing to the loss of $30 billion by government-backed mortgage firms Fannie Mae and Freddie Mac, losses borne mostly by taxpayers.

FHFA regulates Fannie and Freddie, which, along with two other smaller agencies, currently insure or guarantee 90 percent of all new US home loans.

Consumer advocates have urged such a move since the financial crisis, sparked when a bubble in US housing prices popped and mortgage-backed securities lost much of their value, sending shockwaves through the global banking system.

Wall Street banks have been hit with private lawsuits over losses on mortgage-backed securities — which were often touted as ultra-safe, triple-A investments — but so far they have mostly escaped federal government action.

Instead of trying to force the banks to buy back the tainted bonds, the FHFA is demanding reimbursement for losses on the securities held by Fannie and Freddie, the Times said.

None of the banks in question responded to requests for comment from the Times, but it said they argued privately that the losses were caused by the general economic downturn and not by any deception related to mortgages.

They also argue that Fannie and Freddie were sophisticated investors who knew that the bonds carried a certain level of risk.

The Times said the lawsuits are being filed now because of a statute of limitations that expires on Wednesday, the three-year anniversary of the government’s takeover of Fannie and Freddie.