If the Securities and Exchange Commission were an ordinary investor, it would already be too late in trying to sue the banks that issued (allegedly) deficient mortgage-backed securities.
The SEC is not, of course, an ordinary investor. On Wednesday night, the Wall Street Journal broke the news that the SEC plans to send Wells notices, otherwise known as target letters, to several banks that issued mortgage-backed notes and certificates. The Journal said the agency is looking at whether the banks misled investors about the quality of mortgage loan pools underlying securities issued in 2007 and 2008.
But here’s the thing: The first federal-court MBS class action, against Countrywide, was filed in 2007. By 2008, bond insurers and private investors were busily suing MBS issuers in state and federal courts in New York, starting the clock on the three-year statute of limitations for suits under the federal Securities Act of 1933 and the two-year time limit for fraud cases under the Exchange Act of 1934. Private investors who entertained thoughts of bringing federal claims for mortgage-backed notes issued in 2007 and 2008 would be tossed out of court quicker than you can say “time-barred.”
The SEC, in other words, is running at least three years behind the private securities bar when it comes to MBS litigation. I’ve heard, in fact, that the agency has recently been working with private lawyers to hone its MBS investigation. That makes sense: The list of plaintiffs’ firms that have sunk thousands of hours and millions of dollars into their MBS cases includes Quinn Emanuel Urquhart & Sullivan; Bernstein Litowitz Berger & Grossmann; Kasowitz Benson Torres & Friedman; Patterson Belknap Webb & Tyler; Cohen Milstein Sellers & Toll; Robbins Geller Rudman & Dowd and others.
The mystery is why the SEC has taken so long to see what’s been in front of its face. Remember, the agency spent years investigating Countrywide and its leadership. Weren’t mortgage-backed securities part of the investigation? Same thing with Fannie Mae and Freddie Mac, the two biggest players in mortgage securitization. The SEC began looking at Fannie and Freddie in 2008, and ultimately sued three top execs from each housing agency for allegedly misleading investors about subprime mortgage exposure. Surely someone at the SEC looked at the MBS portfolios Fannie and Freddie amassed — particularly because both agencies reached MBS settlements with Bank of America and GMAC’s Residential Capital in 2010.