In a bold move on Sept. 2, the Federal Housing Finance agency filed lawsuits against 17 banks for their alleged practice of fraudulently selling close to $200 billion in securities linked to subprime mortgages.
Several of the banks are major American financial institutions, who some economists say were nearly single-handedly responsible 2008's recession. Bank of America, Merrill Lynch & Co., JPMorgan Chase & Co., and Goldman Sachs & Co., were among the banks listed in the FHFA's legal filings report.
A subprime mortgage is "a type of loan granted to individuals [or couples] with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages," according to Investopedia.com. These mortgages often have higher interest rates than traditional loans of the same type. And most commonly, they're adjustable rate mortgages, in which many individuals with poor credit do not understand.
Investopedia continues, "Many lenders were more liberal in granting these loans from 2004 to 2006 as a result of lower interest rates and high capital liquidity. Lenders sought additional profits through these higher risk loans, and they charged interest rates above prime in order to compensate for the additional risk they assumed. Consequently, once the rate of subprime mortgage foreclosures skyrocketed, many lenders experienced extreme financial difficulties, and even bankruptcy."
The 17 banks are being accused of participating in this unethical lending practice.
A mortgage-backed security is a risky investment in which an investor indirectly purchases "ownership" in a mortgage. "When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan," explains Investopedia.
In the lawsuit report, the FHFA alleges banks did not disclose decisive information about the mortgages which were linked to the securities they sold to Fannie Mae and Freddie Mac.
Uninformed and confident in these purchases, Fannie Mae and Freddie Mac purchased these unstable securities; hence, the housing collapse three years ago.
An independent firm, Clayton Holdings, who analyzed mortgages for several bank firms, is "near the center of the allegations," according to a Sept. 2 Huffington Post article.
The article continues, "Wall Street banks bought pools of subprime home loans to turn into securities, and submitted a percentage of those loans to Clayton for review. Clayton found that as many as 28 percent of these loans failed to meet basic standards, the company revealed in September of last year."
Investors were made aware of this data.
And, "Nearly half the time, banks went ahead and purchased the bad loans anyway, using this information to go back and buy the loans on the cheap, according to Clayton data and testimony from the former executive," said the Huffington Post article.
Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Mortgage Association, are two privately funded lending agencies that were originally designed to make home ownership easier and more affordable for Americans. Fannie Mae began as a government agency in the 1930s under President Roosevelt's New Deal. In the late 1960s, President Lydon B. Johnson privatized Fannie to alleviate financial pressure on the government, caused by the Vietnam War. Freddie Mac was created in 1970 to ensure Fannie did monopolize the secondary mortgage market, according to Rob Alford's "What Are the Origins of Freddie Mac and Fannie Mae."
is a member of the 
