FDIC Suing 12 Banks Over Faulty Mortgage Bonds

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

Last Friday, the Federal Deposit Insurance Corp. sued twelve major banks for supposedly selling faulty mortgage bonds to non-operational Colonial Bank.

Colonial failed in August of 2009 as a  result of bad real estate gambles and a lending scandal associated with now defunct Taylor Bean & Whitaker. Initial speculation by the FDIC estimated the cost of the failure at $2.8 billion.

Banks who bought the $388 million in faulty mortgage-backed securities from Colonial include Citigroup, Wells Fargo, Merrill Lynch, FTN Financial, Royal Bank of Scotland, Ally Financial, First Horizon, Gredit Suisse, UBS, HSBC, Deutsche Bank, and JPMorgan Chase.

According to the FDIC, Colonial Bank made many assertions, many of which were untrue, of material fact with regard to the certificates and specifically the credit quality of the loans which financed them.

The banks refused to comment.
In assessing the deals, the FDIC sampled several transactions with Colonial and found more than half to contain misleading statements about appraisals, loan-to-value ratios, or owner occupancy status. In some bonds, more than two thirds of the loans contained this misleading or fraudulent content, according to the suit.

These accusations resemble a former lawsuit from the Federal Housing Finance Agency, which previously sued 17 banks due to mortgage bonds sold to Fannie and Freddie Mac during the housing bubble. Those lawsuits continue to remain tied up in court.