How the FHFA lawsuits could imperil mortgage-settlement talks

By Felix Salmon
September 2, 2011
Nelson Schwartz, the Federal Housing Finance Agency is going to file lawsuits against a dozen or so big banks some time before Wednesday, claiming fraud in their mortgage-securitization departments.

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So here’s an interesting wrinkle in the mortgage-settlement talks: according to Nelson Schwartz, the Federal Housing Finance Agency is going to file lawsuits against a dozen or so big banks some time before Wednesday, claiming fraud in their mortgage-securitization departments.

This smells very much like the mortgage bond scandal that I was writing about last fall; finally, that shoe might be dropping. And more importantly, it would be a major securitization-related lawsuit being filed by one arm of the federal government, just as another arm is trying to put a big settlement together which might (or might not) give the big banks immunity against precisely such suits.

According to Schwartz, the timing of the suit has nothing to do with the settlement talks, and everything to do with the statute of limitations. But once the suits have been filed, it’ll be hard to persuade the FHFA to drop them quietly — especially if it doesn’t get a large check as part of the settlement. So count this as one more thing which mitigates against any settlement from happening. The banks won’t agree to anything unless they get immunity from securitization-related suits, and the government won’t give them that immunity, not least because it’s a plaintiff in a lot of those suits itself. Expect this saga to drag on indefinitely, rather than being brought to some kind of artificial end through the settlement talks.

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