British Banks Fear Mortgage Lawsuits from US Regulator

Article excerpt

ROYAL BANK of Scotland, Barclays and HSBC were among 17 giant banks sued last night by a US government agency, seeking billions of dollars in compensation over their packaging and selling of mortgage bonds in the run-up to the credit crisis.

The Federal Housing Finance Agency (FHFA) lawsuits also personally named 13 US-based executives who worked in the UK banks' mortgage divisions.

US giants such as Bank of America, JPMorgan Chase and Goldman Sachs, as well as Deutsche Bank, Credit Suisse and Socit Gnrale also received lawsuits.

The FHFA oversees Fannie Mae and Freddie Mac, the US mortgage finance giants that had to be nationalised in 2008 after they guaranteed billions of dollars of toxic bonds backed by mortgages that went into default. They lost more than $30bn (18.5bn) and their liabilities have been taken over by the US taxpayer.

The suits claim that at the height of the US housing bubble the 17 banks failed to run checks required by US securities laws and missed evidence that borrowers had misrepresented their incomes when they parcelled up mortgages for sale as bonds.

RBS was one of the biggest operators in packaging and selling on securities backed by US sub-prime mortgages - a business whose implosion sparked the financial crisis - and the losses in that division were among the reasons it had to be taken over by the British Government.

When mortgage borrowers, tempted by low teaser rates, found themselves unable to repay their loans from 2007 onwards, the value of mortgage securities collapsed.

In July, the FHFA sued the Swiss bank UBS for at least $900m for its activities as a big packager - or securitiser - of US mortgages, and the latest lawsuits are in a similar mould.

"Some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings," the agency said last night.

RBS and Barclays already face litigation in the US by the trustee for Thornburg Mortgage Inc, a bankrupt US lender. In May the court- appointed trustee for Thornburg listed the UK banks among those responsible for the mortgage lender's failure.

By the time the housing bubble reached its peak, HSBC had reined in its securitisation of US mortgages and suffered huge losses on mortgages it had itself written at its Household US operation. …