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Home Loan Bank sues over losses on $3B mortgage portfolio

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The Federal Home Loan Bank of Indianapolis is suing some of the nation’s largest financial institutions to recover losses on a $3 billion portfolio of mortgage-backed securities.

The federally chartered wholesale bank, one of 12 such institutions formed in 1932 to save the housing market after the Great Depression, wants the defendants to buy back money-losing packages of loans the banks sold as safe investments from 2005 to 2007.

The 300-page lawsuit, filed last month in Marion County Superior Court and moved this month to U.S. District Court for the Southern District of Indiana, names 37 defendants including Bank of America, Wells Fargo and J.P. Morgan Chase that sold the Federal Home Loan Bank of Indianapolis 32 issues of mortgage-backed securities with a total face value of $2.96 billion.

The case is one of dozens nationwide seeking so-called put-backs of soured mortgage loans. The cases—brought by government-sponsored enterprises Fannie Mae and Freddie Mac and private investors including Pimco, which runs the world’s largest bond fund—point to omissions and inaccurate statements in offering materials and shoddy loan underwriting as a rationale for refunds.

The Federal Home Loan Bank of Indianapolis says in its lawsuit that banks selling mortgage-backed securities were so eager to unload the mortgages and collect commissions that they “did not tell the truth” about what they were selling, causing FHLBI to suffer “substantial losses.”

The suit does not say how much the bank has lost on its mortgages purchases, but a Securities and Exchange Commission filing shows FHLBI had about $128 million in unrealized losses in its private-label loan portfolio as of Sept. 30.

“The offering documents contained serious misstatements and omissions with respect to the mortgage pools, the creditworthiness of the borrowers, the quality of the collateral and the underwriting standards employed in originating the mortgage loans,” according to the lawsuit, filed by locally based Cantrell, Strenski & Mehringer.

Officials at the Federal Home Loan Bank of Indianapolis declined to comment. Like the other home loan banks, the Indianapolis institution’s primary business is making advances for home mortgages. Its customers—and its owners—are more than 400 banks, credit unions and insurance companies in Indiana and Michigan.

The defendants, who have not yet filed an answer to the charges, had requested the change in venue to the U.S. District Court for the Southern District of Indiana.

The Federal Home Loan Bank’s mortgage portfolio consists primarily of what previously were considered the safest tranches—those last in line to absorb losses—of prime loans underwritten at too high a face value for Fannie Mae or Freddie Mac backing, and Alt-A loans with adjustable rates or reduced documentation, the suit says.

Each of the investments had triple-A ratings from Moody’s, Standard & Poor’s or Fitch that historically yielded a loss rate of less than .05 percent. The same ratings agencies began downgrading the securities to below investment grade in 2008.

For more on this story, pick up this weekend's IBJ.

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  1. So much for Eric Holder's conversation about race. If white people have got something to say, they get sued over it. Bottom line: white people have un-freer speech than others as a consequence of the misnamed "Civil rights laws."

  2. I agree, having seen three shows, that I was less than wowed. Disappointing!!

  3. Start drilling, start fracking, and start using our own energy. Other states have enriched their citizens and nearly elminated unemployment by using these resources that are on private land. If you are against the 'low prices' of discount stores, the best way to allow shoppers more choice is to empower them with better earnings. NOT through manipulated gov mandated min wage hikes, but better jobs and higher competitive pay. This would be direct result of using our own energy resources, yet Obama knows that Americans who arent dependent of gov welfare are much less likely to vote Dem, so he looks for ways to ensure America's decline and keep its citizens dependent of gov.

  4. Say It Loud, I'm Black and Ashamed: It's too bad that with certain "black" entertainment events, it seems violence and thuggery follows and the collateral damage that it leaves behinds continues to be a strain on the city in terms of people getting hurt, killed or becoming victims of crimes and/or stretching city resources. I remember shopping in the Meadows area years ago until violence and crime ended make most of the business pack you and leave as did with Lafayette Square and Washington Square. Over the past 10 to 12 years, I remember going to the Indiana Black Expo Soul Picnic in Washington Park. Violence, gang fights and homicides ended that. My great grandmother still bears the scares on her leg from when she was trampled by a group of thugs running from gun fire from a rival gang. With hundreds of police offices downtown still multiple shootings, people getting shot downtown during Black Expo. A number of people getting shots or murdered at black clubs around the city like Club Six on the west side, The Industry downtown, Jamal Tinsley's shot out in front of the Conrad, multiple fights and shootings at the skating rinks, shootings at Circle Center Mall and shooting and robberies and car jackings at Lafayette Mall. Shootings and gang violence and the State Fair. I can go on and on and on. Now Broad Ripple. (Shaking head side to side) Say It Loud, I'm Black and I'm Ashamed.

  5. Ballard Administration. Too funny. This is the least fiscally responsive administration I have ever seen. One thing this article failed to mention, is that the Hoosier State line delivers rail cars to the Amtrak Beech Grove maintenance facility for refurbishment. That's an economic development issue. And the jobs there are high-paying. That alone is worth the City's investment.

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