MANHATTAN (CN) – Fannie Mae and Freddie Mac say Swiss banking giant UBS defrauded them of $900 million in the housing boom before the financial meltdown. The federal complaint involves 16 UBS-sponsored mortgage-backed securities issues of more $4.5 billion that Fannie and Freddie bought from 2005 to 2007.
The Federal Housing Finance Agency, the lead plaintiff, claims USB Americas, other units of the Swiss bank and three of its former executives violated U.S. securities laws by providing false information to entice the quasi-state agencies into purchases.
The FHFA says a significant percentage of the mortgages underlying the securities were “not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality that was represented.”
As became standard in the run-up to the disaster, the FHFA says a post-crash review of several hundred loan files revealed “numerous instances in which there was a failure during the underwriting process to confirm the reasonableness of the borrower’s stated income or to correctly account for the borrower’s debt, both key factors bearing on eligibility for a mortgage loan.”
The FHFA claims that prospectus supplements supplied by USB were false and omitted material facts “due to widespread falsification of borrower’s income and debt, inflated property values, and misrepresentations of other key characteristics of the mortgage loans.”
“As a result of defendants’ misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated,” the complaint states.
The agencies seek restitution, with interest.
The federal government rescued Fannie Mae and Freddie Mac from the brink of failure in September 2008 as they imploded due to loses tied to risky mortgages. The government estimates the bailouts will cost taxpayers up to $259 billion.
The Federal Housing Finance Agency sued as conservator of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
The defendants are UBS Americas, UBS Real Estate Securities, UBS Securities, Mortgage Asset Securitization Transactions Inc., David Martin, Per Dyrvik, Hugh Corcoran and Peter Slagowitz.
The FHFA is represented by Philippe Selendy with Quinn, Emanuel, Urquhart & Sullivan.