Federal Home Loan Bank of San Francisco sues over mortgage securities

The Federal Home Loan Bank of San Francisco sued nine securities dealers claiming that they misled the bank about the credit quality and risks associated with $19.1 billion in private-label residential mortgage backed securities.  Some of the defendants listed among the securities groups are Units of Credit Suisse Group AG, Deutsche Bank AG, JP Morgan Chase &Co. and Bank of America Corp.  The Federal Home Loan Bank of San Francisco is seeking to annul its purchases of the securities, which were rated AAA based on the information given to them by the securities.
The bank is complaining that the dealers made untrue or misleading statements about the characteristics and qualities of the mortgage loans.  The bank feels that the securities dealers made false statements and omitted important information about the loans that backed the securities they sold.  The Federal Home Loan Bank also claims that the dealers failed to disclose that appraisals were biased upward on the properties, that underwriting guidelines were ignored by originators and that loan to property value ratios were highly exaggerated.
The banks listed in this lawsuit were not immediately available for comment.  The 12 Federal Home Loan Banks in the US took charges of $436 Million on private mortgage securities and home-equity investments in the fourth quarter and $2.4 billion for all of last year according to their Reston, VA finance office.  These Federal Home Loan Banks are government chartered and owned by US financial companies.  They are jointly responsible for the debt they sell to finance loans to members.  It is because of this responsibility that these federal banks would be upset about being misled by other securities.  The federal banks think that they are selling AAA rated loans and dealing with people who are in good financial standing when in fact they are dealing with the opposite.  Because these securities dealers lied on the various portions of the loan applications this completely misled the federal banks and did not allow them to conduct business in a way they are accustomed to.
This is not the first time that banks such as JPMorgan Chase, Morgan Stanley and Goldman Sachs Group Inc. have been sued by Federal Home Loan Banks.  Last year the Federal Home Loan Banks of Seattle and Pittsburgh successfully sued those banks under the same premises that the Federal Home Loan Bank of San Francisco is doing currently.