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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Agnes T. Crane
NEW YORK, July 26 (Reuters Breakingviews) - The $885 million UBS UBSN.VX settlement with the Federal Housing Finance Agency is a big win for Edward DeMarco. As head of the U.S. agency that oversees Fannie Mae FNMA.OB and Freddie Mac FMCC.OB, he has become one of the most reviled regulators inside the beltway. The legal victory should earn him some well-deserved respect.
The lawsuit against UBS is only the third to settle among the 18 that FHFA filed in 2011 against lenders for allegedly selling Fannie and Freddie a bill of goods during the height of the housing bubble. And the Swiss bank was hardly the biggest player. The $4.5 billion of allegedly dodgy bonds it sold to the housing agencies are a small fraction of the $200 billion at issue in the lawsuits.
Bank of America (BAC.N) may be the bank with the most to lose, having bought subprime lender Countrywide and brokerage firm Merrill Lynch. The two were among the biggest participants in Wall Street's game of dressing up low-quality home loans as top rated bonds. FHFA reckons all three peddled some $58 billion in questionable paper. The UBS payout — about one fifth the amount of the bonds the bank sold — suggests BofA could theoretically be on the hook for as much as $12 billion.
The lenders’ losses, however, should be taxpayers’ gain. Though Fannie and Freddie will split the UBS settlement, they’ll probably give it to the U.S. Treasury, because they are already profitable. That could mean as much as $40 billion ultimately flowing into government coffers, assuming all the banks reach agreements even close to UBS’s deal.
That’s real money, the kind regulators like the Securities and Exchange Commission can only dream of raking in. DeMarco's unusual decision to hire top law firm Quinn Emanuel Urquhart & Sullivan to sue on the FHFA's behalf may have had something to do with the suit’s success. Legal fees will reduce taxpayers’ cut, but the payoff seems worth it.
DeMarco will still have detractors. Many resent, for instance, his refusal to slash the principal amount of Fannie and Freddie-held mortgages that exceeded the value of homes. With the real estate market on the rise, however, he may finally win some applause for sticking it to the banks.
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- The Federal Housing Finance Agency on July 26 said that UBS will pay $885 million to settle a lawsuit that alleged the bank misled Fannie Mae and Freddie Mac into buying $4.5 billion of problem mortgage bonds. The lawsuit against UBS is the third to settle among the 18 that FHFA filed against lenders in 2011. Citigroup (C.N) and General Electric (GE.N) reached settlements earlier this year, though neither disclosed terms. The lawsuits target $200 billion worth of mortgage bonds sold to Fannie and Freddie.
- Bank of America, along with Countrywide and Merrill Lynch, both of which the bank acquired, account for more than a quarter of the $200 billion questionable mortgages sold to the U.S. housing agencies.
- The FHFA became Fannie and Freddie’s conservator after the two firms failed in 2008 due to losses on their mortgage portfolio.
- FHFA press release: link.reuters.com/puw89t
- Reuters: Banks shiver as UBS swallows $885 mln US fine [ID:nL1N0FV2F8]
Wrong target [ID:nL2N0D41H3]
- For previous columns by the author, Reuters customers can click on [CRANE/]
(Editing by Reynolds Holding and Martin Langfield)
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