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FHFA files lawsuit claiming a $4.5 billion loss at UBS’ hands

UBS sign in Switzerland, photo by twicepix.

Housing authority sues UBS

In March, the FDIC filed suit against Washington Mutual executives for $900 billion, citing reckless lending which led to the bank’s demise, damaging investors and the economy at large.

The U.S. Federal Housing Finance Agency (FHFA) which regulates Fannie Mae and Freddie Mac has now filed suit against Swiss bank UBS, alleging they knowingly misled Fannie and Freddie into buying risky mortgage debt, leading to over $900 million in losses.

Fannie and Freddie lost $4.5 billion

The complaint filed today states that Fannie Mae and Freddie Mac lost over 20% of their investment in residential mortgage-backed securities sold by UBS to the tune of $4.5 billion from September 2005 to August 2007. They allege UBS hid or misstated the quality of the underlying loans and underwriting, and the borrowers’ ability to make payments, and generally failed to do proper due diligence. The suit claims that of nearly one thousand loans randomly reviewed, 78% were improperly underwritten with ratings of the majority of this sampling falling to the lowest grade by May 2011.

The lawsuit stated that “Fannie Mae and Freddie Mac did not know of the untruths and omissions. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE certificates.”

The FHFA is seeking to recoup the losses at UBS’ hands and to actually undo the purchases.

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Pursuing additional lawsuits

The FHFA noted in a statement that they plan on pursuing additional lawsuits to recover losses by Fannie Mae and Freddie Mac at the hands of banks that allegedly behaved irresponsibly.

There is no word on which banks are next, but FHFA has made it abundantly clear that they plan on filing more suits in short order, claiming they would never have purchased any of the GSE certificates had they known that any of the underwriting was bad, much less the majority of underlying loans having been downgraded.

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