Seventeen banks and mortgage lenders, including Memphis-based First Horizon, were sued by the federal government Friday, the latest development in a broad-ranging housing scandal that caused havoc on Wall Street and crippled the Tennessee bank’s earnings late last decade.
Bigger names, including Bank of America, Citigroup and Goldman Sachs, may be the prime targets of the lawsuits in a Manhattan court, but the parent of First Tennessee Bank was also swept up in the case.
Between September 2005 and April 2007, First Horizon and related entities sold $883 million in mortgage-backed securities to Fannie Mae and Freddie Mac containing false or misleading statements and omissions, according to the 78-page complaint filed in New York State Supreme Court in Manhattan.
The federal suit says that borrowers’ credit scores were misrepresented, property values and appraisals were inflated, and loan-to-value ratios meant to protect the bank and investors were exaggerated on some securitized loans.
First Horizon had “enormous financial incentives to complete as many offerings as quickly as possible, without regard to ensuring the accuracy or completeness,” the suit contends.
In 2006 First Horizon securitized $1.74 billion of loans, or about double its volume of a year earlier, the government says.
“Poor origination practices eventually caught up to (First Horizon), and many entities that purchased loans … forced the company to buy them back,” the federal suit says.
First Horizon reported$148.5 million in charges related to such a turn of events in its 2008 annual report alone.
The bank holding company has since retrenched and backed off its aggressive home loan and mortgage-backed securities binge that caused tens of millions of dollars in losses dating to 2008.
Kim Cherry, First Horizon spokeswoman, said Friday that the suit has not yet been reviewed, but that “we will vigorously defend ourselves.”
Home mortgage-backed securities were risky investments whose collapse after the real-estate bust helped fuel the financial crisis that erupted nationally in late 2008.
Refunds demandedThe lawsuits were filed Friday by the Federal Housing Finance Agency, which oversees mortgage buyers Fannie Mae and Freddie Mac.
Among the bigger of the 17 institutions targeted by the lawsuits are Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs.
The FHFA has been demanding refunds from banks for loans sold to Fannie Mae and Freddie Mac that were based on false or missing information about borrowers and properties.
The two government-backed mortgage finance firms had to be rescued by taxpayers as defaults on home loans soared toward record levels.
The agency said in Friday’s filings that Fannie Mae and Freddie Mac bought $6 billion in securities from Bank of America; $24.8 billion from Merrill Lynch, which Bank of America bought; and $3.5 billion from Citigroup.
Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.
Since running up large real estate loan losses — including on out-of-state loans in Florida, for instance — First Horizon (the parent of First Tennessee Bank) has pulled back on lending in such hard-hit markets and focused on its core area much more in recent quarters.
On Friday, the bank’s stock fell 46 cents a share, or 6.8 percent, to close at $6.31 a share on the New York Stock Exchange. Its stock was trading as high as $12.53 a share in mid-January.
Institutions such as Barclays Plc, Countrywide Financial Corp., Nomura Holding America Inc., HSBC North America Holdings and Credit Suisse Holdings (USA) also were among those named as defendants in separate documents.
Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment, as did Kerrie Cohen, a spokeswoman for Barclays, and Kristin Lemkau, a spokeswoman for JPMorgan.
