Restitution Payments to Fannie Mae and Freddie Mac

Banks Pay Up, But Will It Help Homeowners?

Restitution Payments to Fannie Mae and Freddie Mac
February 21, 2014

The subprime mortgage crisis was aggravated by the deceptive practices of financial institutions in bundling mortgage-backed securities. It was alleged that banks rid themselves of significant amounts of high-risk mortgages by packaging them in bundles with bonds and other more stable investments – similar to the old grocery store trick of selling a large bag of apples cheaply, knowing that some of the unseen apples were probably bad. To extend the metaphor, the banks were charged with not fully disclosing the actual volume of bad apples, or how rotten some of them were.

Fannie Mae and Freddie Mac were hit especially hard, with many defaulting loans, and were driven to the point of requiring government rescue. Both agencies were put into conservatorship and placed under the authority of the Federal Housing Finance Agency (FHFA) in 2008.

To recover the eventual losses created by loans that were sold to Fannie Mae and Freddie Mac, FHFA sued 18 major financial institutions from July to December of 2011. Banks put up a vigorous defense, claiming that administrators at Fannie Mae and Freddie Mac should have known about the risks involved. Administrators claimed that the quality of the loan bundles was misrepresented to Fannie Mae and Freddie Mac.

Regardless of which side is most culpable (and both merit blame), the banks have fared worse so far in court. Of the eighteen institutions involved, seven have chosen to settle, including UBS ($885 million), J.P. Morgan Chase ($4 billion), Deutsche Bank ($1.92 billion), and the most recent addition to the group, Morgan Stanley ($1.25 billion). While these amounts sound impressive, they represent just a 10% recovery of actual losses , and a virtual rounding error on the balance sheets of these financial behemoths. To put it mildly, none of the senior executives at Morgan Stanley or Chase are going hungry tonight.

The remaining banks are expected to settle soon. Bank of America is expected to take an especially large hit, with several analysts predicting a $5-$8 billion settlement.

How does any of this money get back to homeowners? It's not obvious that it ever will, as the majority of recovered funds flow straight to government coffers. Since Fannie Mae and Freddie Mac are in government conservatorship, they are required to turn over the lion’s share of this money to the U.S. Treasury. The major emphasis of this effort appears to be recovering funds and putting Freddie Mac and Fannie Mae on more sound financial footing, not distributing aid to homeowners.

If you're a homeowner, you may not want any reimbursement anyway, at least not at the moment. The Mortgage Forgiveness Debt Relief Act was allowed to expire in December 2013, and has not been restored as of February 2014. As a result, it's likely that any refund you would receive as a homeowner would be taxable, drastically increasing your taxes and putting you right back in the soup. Keep an eye on both of these issues as the year progresses to avoid any nasty surprises.

There are other housing crisis-driven lawsuits directed at banks aimed at homeowner recovery. For example, there was a joint state and federal effort known as the National Mortgage Settlement that successfully sued five banks (Ally/GMAC, J. P. Morgan Chase, Wells Fargo, Citi, and Bank of America) for "robosigning,” or automatic signing off on mortgages without knowing the terms. While the due date has now passed for claims on this program, there may be others to follow.

In summary, there are multiple ways that banks are being compelled to provide restitution for housing-related misdeeds. However, the burden rests on you to look for them, and to determine whether you qualify. Happy hunting!

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