Now that the Federal Housing Finance Agency (FHFA) has sued the pants off of 17 issuers of nonprime MBS, the big question boils down to this: How much will the agency actually collect?

The actual answer may not be known for years but the agency — which declined to discuss its legal strategy with this columnist — is following the paper trail created when a mortgage bond is created. In short, it is going after executives who signed the actual shelf registration forms on bonds purchased by Fannie Mae and Freddie Mac.

It's not as though these executives were actually involved in selling nonprime tranches to the GSEs. That role was played by MBS traders at firms such as Countrywide Securities, Deutsche Bank, Goldman Sachs, Morgan Stanley and the rest of the defendants list.

Amazingly, no traders were sued, that is, unless they signed the shelf registration forms filed with the SEC.

Also absent from the defendant list are CEOs of the 17 firms, which explains why Countrywide founder and chairman Angelo Mozilo was not named, but president Stan Kurland was. Kurland, who now heads of a successful mortgage REIT called PennyMac, was actually forced out of CFC by Mozilo in 2006 because he wanted the company to be more conservative and exit subprime. (Oh, the irony.)

Why was Kurland sued? Answer: Because he signed the shelf registration forms on seven bonds that Countrywide sold to Fannie Mae.

From what I understand, it's likely that the FHFA is going after the easy D&O insurance money at these firms. D&O stands for directors and officers. In many cases financial companies take out D&O policies to cover their executives on financial decisions they make regarding their firms.
The FHFA is going after the D&O policies because they have paper proof that these executives signed the bond documents, even though none of them actually read what they were signing. (Chances are more defendants will be added to the 17 original filings.)

Already, the FHFA has issued follow-up statements shooting down statements made by Wall Street types who say the GSEs were “sophisticated” investors and should've know what they were buying.

And what exactly did Fannie and Freddie buy from Wall Street? Answer: The AAA-rated portion of nonprime MBS issued by such stellar lenders as Ameriquest, Option One, WMC Mortgage, First Franklin and dozens of others. Where are all these lenders today? They're dead—so the only place to look for money (damages) is from the MBS underwriters.

In total, the FHFA is placing claims on roughly $200 billion of mortgage bonds, even though (at last count) the GSEs held $250 billion of nonprime-related MBS. (Note: This doesn't even include all the alt-A whole loan garbage that Fannie bought from its once favorite client, Countrywide.)
So, how much will the agency actually collect? It's hard to say. Chances are none of these cases will ever go to trial. In the end, all 17 will settle for an amount that will be a lot less than $200 billion. The D&O money will be a fraction of the final amount, but at least it will be something.
In the meantime, the lawsuits are an opening salvo, marking the start of what could be a year or two of negotiations between the FHFA's outside counsel and the 17.

In the meantime, the FHFA lawsuits will impact the ongoing settlement talks between the state attorneys general and major bank servicers ensnarled in the robo-signing scandals. (Some of these firms, but not all, are involved in both scandals.) The robo talks have been going on since March and the parties are nowhere near an agreement.

American Bankers Association senior vice president Bob Davis noted that banks are facing multiple enforcement actions and lawsuits. And the FHFA's action presents another obstacle to a settlement between the AGs and servicers. “We have no idea where the investor claims will go. I think it's a significant impediment to a settlement with the AGs,” Davis told ASR sister publication National Mortgage News.

In other words, just when the mega-servicers thought their woes were behind them a new lawsuit smacks them in the face.
— Brian Collins contributed to this report

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.