Federal Home Loan is one of 12 banks in the nation set up by the U.S. government in 1932 to provide money at low interest rates to community banks. Now, they are at the center of a lawsuit, claiming that they bought investments from 37 banks, including Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and JP Morgan Chase (NYSE: JPM), based on home loans whose paperwork is riddled with inaccurate appraisals and other flaws.
In Indianapolis federal court, the bank has asked Judge William T. Lawrence to rescind deals in which it bought $3 billion worth of securities as investments. The lawsuit filed here follows similar lawsuits on the West Coast by sister home loan banks in San Francisco and Seattle seeking to force banks to buy back $25.6 billion of investments. The home loan system is trying to claw back the money in court as the Federal Deposit Insurance Corp., a separate agency, steps up its investigations. The FDIC, which insures bank deposits and monitors banks, is looking for possible criminal actions by bankers involved in the mortgage industry.
During the past decade, more than $1 trillion in home loans were packaged into thousands of bonds resold around the world as investments called mortgage-backed securities. When the low income borrowers inevitably defaulted on these loans en masse between 2006 and 2007, this triggered a series of unfortunate events leading to the collapse of many financial firms. In Washington, analysts at Compass Point Research and Trading figure the country’s 11 top banks might return $200 billion if they lose all the mortgage cases that confront them in courtrooms. Some analysts speculate that the return could be higher, with Bank of America alone potentially having to pay back as much as $375 billion in securities. Bank of America is the country’s second largest bank to Wells Fargo (NYSE: WFC), and acquired the former Countrywide and Merrill Lynch brands amidst the carnage of 2008.
Defendants named in the Indianapolis home loan bank’s lawsuit include Chase Mortgage, Credit Suisse USA, First Horizon Asset Securities, GMAC Mortgage, Indymac, UBS Securities, Washington Mutual and Wells Fargo.
