Federal Home Loan Bank Sues Over Mortgage Securities

By Karen Gullo and Jody Shenn

March 16 (Bloomberg) — The Federal Home Loan Bank of San Francisco sued nine securities dealers alleging they misled it about the credit quality and risks of loans behind $19.1 billion in private-label residential mortgage-backed securities.

Units of Credit Suisse Group AG, Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp. were among the defendants named in two securities complaints filed yesterday in state court in San Francisco, according to the court’s Web site. The bank is seeking to rescind its purchases of the securities, which were rated AAA “based on the information provided by the securities dealers,” the Federal Home Loan Bank said in a statement on its Web site.

The bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities,” according to the statement.

The dealers made false statements or omitted important information about the loans that backed the securities they sold, the bank alleged in its complaints. The bank claims the dealers failed to disclose that appraisals were biased upward on properties that secured mortgage loans, that underwriting guidelines were ignored by originators and that loan to property value ratios were exaggerated.

Bank Responses

Bill Halldin, a Bank of America spokesman, and Renee Calabro, a Deutsche Bank spokeswoman, declined to comment today on the lawsuits. David Walker, a spokesman for Credit Suisse, and JPMorgan spokesman Brian Marchiony didn’t immediately return voice-mail messages seeking comment after regular business hours today.

Amy Stewart, a spokeswoman for the Federal Home Loan Bank of San Francisco, didn’t immediately return a voice-mail message.

The 12 Federal Home Loan Banks in the U.S. 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 a statement from their Reston, Virginia- based finance office last month.

The Federal Home Loan Banks of Seattle and Pittsburgh last year sued banks including JPMorgan Chase, Morgan Stanley and Goldman Sachs Group Inc.

The Federal Home Loan Banks system, with $905.5 billion of debt as of Feb. 28, is the largest U.S. borrower in the bond market after the federal government. Federal Home Loan Banks lend money to more than 8,000 thrifts, credit unions, insurers and commercial banks at below-market rates, mainly to finance their mortgage holdings. The banks also buy and hold mortgage- related assets.

Government Chartered

The regional Federal Home Loan Banks are government- chartered cooperatives that are each owned by U.S. financial companies. They are jointly responsible for the debt they sell to finance loans to members.

The cases are Federal Home Loan Bank of San Francisco v. Credit Suisse, CGC-10-497840 and Federal Home Loan Bank of San Francisco v Deutsche Bank, 10-497839, San Francisco Superior Court.

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

Statement Regarding PLRMBS Litigation


The Suits…

Here is the first case…


Here is the Second case…

Federal Home Loan Bank of San Francisco v Credit Suisse Securities USA LLC Et Al