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Faulty mortgage loans catch up with 17 big banks

Faulty mortgage loans were a major contributor to the recession and now a US regulator is suing 17 big banks for their role in those faulty loans.

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Such payouts would reduce earnings and weaken capital levels, perhaps harming the ability of banks to lend money and provide much-needed life to a stalled housing market and weakened economy.

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Whether to take action for mortgage bond problems had been under discussion since Fannie Mae and Freddie Mac were placed in conservatorship, a person familiar with the matter said.

While the ultimate amount FHFA will seek is still unclear, that person said it could top the $20 billion settlement being discussed by the banks and the state attorneys general.

Arthur Wilmarth, a George Washington University law professor, said the banks might argue Fannie Mae and Freddie Mac knew how risky the securities they bought were.

If the companies had reason to know mortgages were ''essentially being given to anyone with a pulse, then banks could argue they were at least partially at fault,'' he said.

A BLIZZARD

The blizzard of litigation against banks is hurting share prices because investors are unable to estimate the ultimate scope of a given bank's legal liabilities.

Bank of America, for example, had intended its proposed $8.5 billion settlement in June with investors in Countrywide mortgage securities to resolve most litigation tied to its disastrous 2008 takeover of that home loan provider.

But many parties are objecting, and that settlement did not stop insurer American International Group Incfrom suing the bank for $10 billion over its own alleged losses.

Nor did it stop Nevada's attorney general from threatening to withdraw from an $8.4 billion nationwide settlement with the bank. The AG now wants to sue the bank, accusing it of reneging on promises to modify mortgages.

Meanwhile, the U.S. Justice Department in May sued Deutsche Bank, accusing it of misleading a U.S. housing agency into believing loans it made qualified for federal insurance.

The FHFA's lawsuits follow an initial lawsuit in July against UBS AG seeking to recover $900 million of losses incurred on $4.5 billion of debt.

One legislator praised the expected FHFA lawsuits.

Brad Miller, a Democratic congressman from North Carolina, said: ``Not pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already.''

Since Fannie Mae and Freddie Mac were seized, taxpayers have spent more than $140 billion to keep them afloat.

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