If you thought you, as a homeowner, were all alone in this battle against lenders, you’re not. Federal regulators just recently launched a broad legal assault on big banks, claiming they sold nearly $200 billion in fraudulent mortgage investments to housing giants Fannie Mae and Freddie Mac that led to massive losses during the financial crisis.
The federal lawsuits, brought by the Federal Housing Finance Agency, named 17 domestic and foreign banks as defendants. Among them (click each bank name to see individual lawsuits against each bank): Bank of America, J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Citigroup and Deutsche Bank. According to the court filings, those firms and others “falsely represented” the quality of the loans that were bundled into securities and sold to investors and “significantly overstated the ability of the borrower to repay their mortgage loans.” The result, the suits claim, were investments that were far riskier than the banks led taxpayer-backed Fannie Mae and Freddie Mac to believe, and the securities ultimately were worth a fraction of their original value.
In my opinion, these lawsuits by the federal government against the banks are significant for two reasons. The first shows what a mess we’re in–the government is now suing the very banks that it bailed out to the tune of hundreds of billions of dollars just a few short years ago. I understand the reason why (and I’m sure politics had a lot to do with it), but it seems a counter-productive to sue the very entity you’re trying to help.
The second reason that I believe these suits are significant is that, according to the allegations, it shows just how little you can trust these banks. They were receiving a massive handout from the government–a lifeline that kept the financial system from collapsing–and they still tried to push off a pile of junk onto Uncle Sam. It reminds me of the old Life cereal commercial where the kids don’t want their breakfast and push it off to Mikey because he’s the younger brother and won’t object. Well, according to this lawsuit, these banks didn’t want their breakfast, i.e. the bad loans they made, so they simply slid them down the table for the U.S. taxpayer to eat.
If these firms are willing to bite the hand that feeds them–literally, the hand that saved these institutions from suffering the same fate as Bear Stearns and Lehman Brothers–just imagine what they’re willing to do to you. If a multi-billion dollar bailout from the federal government doesn’t keep them in line, what odds do you think you have with your $100,000, $200,000, or $300,000 mortgage?
Now, I’m not saying that everything that lenders do is wrong or in bad faith. After all, they have made many, many loans and helped a lot of families live the American dream. However, what I am saying is that you shouldn’t count on your lender to work in your best interest, particularly if you are struggling with your mortgage. As we’ve preached on this blog many times, you have to look out for yourself. Don’t count on representations made over the phone with the “call center in India.” If you think you have a workout agreement, modification, or loan forbearance with your lender, GET IT IN WRITING!!! Without more, you will most likely not be able to enforce some representation made over the phone by a call center operator (who doesn’t know anything more about your loan than what’s pulled up on their computer screen).
Uncle Sam has taken matters into their own hands by pursuing legal action against the banks. Say what you will about the propriety of suing the entities they bailed out, but the federal government has gone on the offense to protect their interests. Homeowners should do the same.