News / Economy

US Banks Face Federal Lawsuit Over Mortgages

Bank of America booth at the Pacific Coast Builders Conference in San Francisco, California, June 23, 2011.
Bank of America booth at the Pacific Coast Builders Conference in San Francisco, California, June 23, 2011.

News reports say the United States government will sue major banks for allegedly misrepresenting the quality of mortgage securities they sold before the financial crisis.  The news comes after a volatile August on U.S. markets for banking stocks, which finished the month 15 percent lower.

Bank of America, JPMorgan Chase, Goldman Sachs, and Germany's Deutsche Bank are among more than a dozen banks that news reports say the U.S. Federal Housing Finance Agency will sue.

The agency is expected to argue that the banks missed evidence that borrower incomes were falsified, and then packaged mortgages to sell as securities.

Mark Lamkin, president of Lamkin Wealth Management, says banks are not the only ones to blame for the collapse of the housing market in 2008.

“They should be suing the rating services.  The banks can’t rate their own portfolios.  They have to go to the S&Ps and Fitches of the world to get these things rated.  Had they not rated these things Triple-A, then they never would have been sold like they were sold,” Lamkin said.

Lamkin says lax government regulation and consumer ignorance also contributed to the crisis.

Officials at the Housing Finance Agency would not comment on the reports of a lawsuit.

News of the legal action comes after a volatile August that saw bank share prices plummet 35 percent at one point.  

Mark Lamkin says the lawsuit places additional pressure on bank profits, but will not necessarily frighten investors in the short term.  However, things could change.

“If the numbers get eye-popping (surprisingly large) and banks have to raise capital or banks really talk about bailout or the FDIC (Federal Deposit Insurance Corporation) coming in -- if it gets to that point, then yes, you’re going to spook markets, consumers and then some,” Lamkin said.

The U.S. stock market tumbled on Friday with the release of a dismal jobs report.  

James Sweeney, editor of the New York Financial Press, says several risk factors could hurt bank stocks.

“We have so much more coming out, whether it be the Fed chairman’s speech in the middle of September, whether it be further jobless claims figures, whether it be employment data -- private, public.  There is so much more to be answered in terms of whether volatility is possible,” Sweeney said.

The collapse of the U.S. housing market sparked a global financial crisis.  Sweeney notes that in a globalized economy, American banks are in turn affected by events overseas.  He points to Europe, whose banks are being hurt by unemployment and sovereign debt problems in several nations.

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