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.
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