Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are probably not long for this world, having taken a lot of the blame (deserved or not) for the financial crisis that we’re just now recovering from, but in the meantime they are making a decent profit suing banks that sold the two entities mortgage-backed securities that turned out to be a lot more risky than advertised.
Now American International Group Inc (NYSE:AIG) is following their lead by suing Bank of America Corp (NYSE:BAC) for $10 billion, and it may sue Morgan Stanley (NYSE:MS) over $3.7 billion in mortgage-backed securities, and Rafferty Capital Markets vice president of equity research Richard X. Bove thinks this new trend isn’t being given enough attention.
Richard Bove on bank underwriting standards
“There has been no linkage in the minds of the regulators or the media that perhaps the tens of billions being paid out by the banks in these settlements might impact bank underwriting standards,” he writes. “There appears to be very little linkage in the minds of investors over this issue either. It does not seem to be understood that these lawsuits are changing the secular earnings of the banks either. I wonder how many lawsuits and how many perhaps hundreds of billions need to be extorted before this lesson is learned.”
There’s popular support for the litigation because people know that the banks were bailed out while the rest of the country suffered, but Bove is right that it probably isn’t having the impact that people imagine. When JPMorgan Chase & Co. (NYSE:JPM) is forced to cough up $13 billion, for example, it’s really shareholder money that is being given to the government. The individuals who bundled and sold mortgage backed securities (arguably fraudulently) really aren’t affected by the lawsuits.
Fannie Mae and Freddie Mac to extend home ownsership
That doesn’t mean the litigation needs to stop (although that certainly is Bove’s position), but it’s happening on a large enough scale that the secondary impacts of these huge settlements need to be discussed. There may be a lot of popular support for big banks to get hit with heavy fines, but if that means mortgage growth continues to drag and working class families can’t get a home loan, it’s a problem. Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) were created to extend home ownership. It would be a shame if they suppressed home ownership by going after the banks in their third act.