Owner occupancy, LTVs at heart of FHFA lawsuits

Major banks allegedly misrepresented the owner occupancy and loan-to-value ratios by sometimes as many as 50 percentage points or more on securities sold to Fannie Mae and Freddie Mac, according to the lawsuits the Federal Housing Finance Agency filed last week. The FHFA, overseer of the government-sponsored enterprises, filed suits against 17 major banks and scores of individual executives, alleging they knowingly falsified the quality of mortgage-backed securities sold to the GSEs. The lawsuits span nearly $190 billion in MBS. The FHFA checked the presale prospectus for the securities and conducted an analysis of 1,000 loans per bond. In securitizations of less than 1,000 mortgages the FHFA analyzed them all. The agency first targeted the owner-occupancy rate reported to the GSEs. Borrowers who actually live in the home underlying the mortgage are more likely to remain current on the loan compared to investors who buy to rent. FHFA looked at whether or not the borrower's tax bill was sent to the property's address or a different one, whether the borrower claimed a tax exemption or whether the mailing address of the property was reflected in credit reports, tax or lien records. On one securitization underwritten by JPMorgan Chase (JPM), owners did not occupy 2.5% of the underlying properties, according to the prospectus given to investors. After conducting the test, the FHFA found this number to be at 14.6%, more than five times the amount disclosed to investors. "The data analysis revealed that for each securitization, the prospectus supplement misrepresented the percentage of non-owner occupied properties," according to the lawsuits.

The FHFA also conducted retroactive automated valuation models to determine the value of the properties at the time the mortgages were originated. This was done to uncover any possible faulty loan-to-value ratios. The prospectus for one security issued in 2007 underwritten by Bank of America (BAC) stated all of the loans held a LTV ratio of less than 100%, meaning the mortgage equaled the value of the home. But according to the FHFA analysis, more than 8.8% of the loans in the security actually held LTVs above 100%. Another security issued by Countrywide Financial Corp. showed 27% of the loans held LTVs higher than 100%, according to the analysis, as opposed to none as was disclosed to investors. On one Bear Stearns securitization platform, called SACO 2007-1 and containing loans originated by EMC – both acquired by Chase – the prospectus disclosed to investors showed none of the loans held an LTV above 100%. According to the FHFA, more than 57% of the mortgages were actually worth more than the underlying property. The collateral quality is long in question on some of the deals. In a suit brought in January 2011 by mortgage bond insurer Ambac Assurance Corp. (ABK), unrelated to the FHFA litigation, a Bear Stearns deal manager allegedly referred to one SACO transaction, now under FHFA scrutiny, as "a sack of sh*t."

"Applying the AVM to the available data for the properties securing the sampled loans shows that the retroactive appraised value given to such properties was significantly higher than the actual value of such properties," the FHFA said in the lawsuits, signaling once again the sizable role appraisers played in the doomed housing bubble. The FHFA said Tuesday it would not be seeking the total dollar figure of the questionable securities Fannie and Freddie bought. It could not give an estimate at the time. "Under the securities laws at issue here, it does not matter how 'big' or 'sophisticated' a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold," the FHFA said. 

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