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Federal regulator subpoenas firms as Fannie and Freddie attempt to regain losses

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By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, July 13, 2010

A federal regulator subpoenaed mortgage lenders and other companies for loan documents Monday in an effort to reclaim funds they may owe government-backed firms Fannie Mae and Freddie Mac.

In the years of the housing boom, Fannie and Freddie bought hundreds of billions of dollars in investments known as private-label securities. Those securities often comprised subprime loans and other risky mortgages.

Fannie and Freddie insist that they were sold billions of dollars of these loans on deceptive grounds -- and that the companies that sold them the loans should be held responsible for their heavy losses on them.

But lenders and other firms that did business with Fannie and Freddie don't want to pay them for the losses. And they are resisting Fannie and Freddie's efforts to obtain documents that would show whether the investments were aboveboard.

The Federal Housing Finance Agency, which oversees Fannie and Freddie, is now getting into the mix, announcing Monday it has issued 64 subpoenas to firms for loan applications, property appraisals and other documents that would show whether Fannie and Freddie ought to be liable for losses on private-label securities.

If the documents show they were misled into buying the securities, Fannie and Freddie could insist that firms buy back the troubled securities and pay for the losses. Such payments could then be used to reimburse the U.S. Treasury, which has helped Fannie and Freddie stay afloat with $145 billion in taxpayer aid.

"By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the Enterprises and thus taxpayers," the FHFA's acting director, Edward J. DeMarco, said in a written statement.

Fannie and Freddie together own about $255 billion in private-label securities. These securities included subprime loans, which were extended to people with thin or weak credit histories, as well as exotic loans such as adjustable-rate mortgages known as option ARMs. Option ARMs allowed borrowers to treat their mortgages as credit accounts, paying a small minimum payment each month while their balance grew to an unsustainable size.

Later analysis has shown that these types of loans were sometimes made on fraudulent grounds -- and that the companies that packaged the loans and sold them to investors didn't perform the appropriate oversight to ensure they were on the up-and-up.

Freddie said in a recent regulatory filing that lenders owe it $4.8 billion, up 26 percent from three months earlier. The company said a third of its demands to lenders for compensation have gone unfulfilled for three months. Fannie doesn't disclose similar numbers.

The FHFA declined to release the names of the companies being served subpoenas. Some firms have gone bankrupt.


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