The regulator for Fannie Mae and Freddie Mac sued UBS AG to recover more than $900 million of losses after the Swiss bank misled the housing agencies into buying $4.5 billion of risky mortgage debt.
In announcing Wednesday's lawsuit, the U.S. Federal Housing Finance Agency said it also plans more lawsuits to recover additional losses by Fannie Mae and Freddie Mac from investments in private-label debt.
Last July, the FHFA issued 64 subpoenas to banks, seeking details about subprime and other mortgage debt that Fannie Mae and Freddie Mac bought when the housing market was healthy.
The UBS case is part of a push by Washington to hold banks responsible for the nation's housing problems. It is also the latest effort to prop up the government-sponsored enterprises (GSEs), whose September 2008 federal seizure has so far cost taxpayers more than $135 billion.
From the issuance of 64 subpoenas last year to the filing of this lawsuit and further actions to come, we continue to seek redress for the losses suffered, FHFA Acting Director Edward DeMarco said in a statement.
The GSEs remain crucial to the housing market, having in 2010 guaranteed 70 percent of single-family mortgage-backed securities that were issued, and provided $1.03 trillion of market liquidity, an FHFA report to Congress last month shows.
UBS spokesman Peter McKillop had no immediate comment. FHFA spokeswoman Corinne Russell declined further comment.
In May, the government filed a fraud lawsuit accusing Deutsche Bank AG of misleading the Federal Housing Administration into believing many low-quality mortgages issued by the German bank's MortgageIT unit qualified for insurance. Deutsche Bank is seeking to dismiss that case.
According to the UBS complaint, Fannie Mae and Freddie Mac lost more than 20 percent of their investment in over $4.5 billion of residential mortgage-backed securities that the bank sold in 16 securitizations from September 2005 to August 2007.
Filed in the U.S. District Court in Manhattan, the complaint also said UBS failed to do adequate due diligence, and hid or misstated the quality of the underlying loans and underwriting, as well as borrowers' ability to make payments.
Many of the loans were issued by lenders that later failed or went bankrupt, including American Home Mortgage Investment Corp, IndyMac Bancorp Inc and New Century Financial Corp.
According to the complaint, a review of 966 randomly chosen loans from two triple-A rated securitizations in 2006 and 2007 found that 78 percent were not underwritten properly.
By May 2011, the complaint said, these securitizations were rated CCC by Standard & Poor's and Ca by Moody's Investors Service, among the lowest junk grades.
Fannie Mae and Freddie Mac did not know of the untruths and omissions, the complaint said. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE certificates.
The lawsuit seeks to recoup Fannie Mae's and Freddie Mac's losses and undo the purchases, among other remedies.
Other banks including Bank of America Corp and its Countrywide unit have faced lawsuits by investors who claim to have lost money on mortgage-backed debt.
Republican lawmakers in Washington have been trying to reduce taxpayer support for Fannie Mae and Freddie Mac and attract more private capital to the $10.6 trillion residential mortgage market. The Treasury Department pledged in December 2009 to provide unlimited aid to the GSEs through 2012.
The case is Federal Housing Finance Agency v. UBS Americas Inc et al, U.S. District Court, Southern District of New York, No. 11-05201.
(Reporting by Jonathan Stempel; Editing by Gerald E. McCormick, Richard Chang and Matthew Lewis)