Big Bank Pays $885 Million Fine For Mortgage Fraud


The largest bank in Switzerland will pay an $885 million fine to U.S. mortgage regulators to settle allegations it defrauded the government. UBS is the third of 18 banks sued by the Federal Housing Finance Agency (FHFA) to settle but the first whose fine payment is known. Citigroup and General Electric paid undisclosed amounts to resolve FHFA litigation earlier this year.

The suits, filed in 2011, accuse banks and other mortgage underwriters of misleading Fannie Mae and Freddie Mac, two FHFA agencies, about pooled mortgages totaling over $200 billion in value. The firms systematically overstated the financial health of the pooled loans when selling them, the suits allege. UBS sold Fannie Mae and Freddie Mac a total of over $6 billion worth of mortgage-backed securities.

Citi, GE, and UBS account for a relatively small portion of the total amount in question, at around $10 billion combined. Other firms whose alleged fraud was much larger are likely to continue fighting the lawsuits. Bank of America is on the hook for over $40 billion worth of misrepresentations to the government because of its purchase of Merrill Lynch and Countrywide.

Since the payments required to settle the charges are commensurate to the size of FHFA’s losses on the deals, BOA and other parties facing the suits would likely have to pay much steeper fines than the one disclosed Friday. Analysts attempting to guess at just how steep those fines might be have found European banks might have to pay a combined $11 billion to resolve the suits.

Lawyers defending the firms have made a strange argument: Fannie Mae and Freddie Mac should have known better than to trust the banks’ claims about the mortgages in question. The attorneys “are pursuing a dubious theory that the GSEs were ‘sophisticated investors’ who ‘had to know’ that the banks flouted their legal obligations of due diligence,” finance expert David Fiderer wrote in The American Banker last month. UBS’s decision to swallow an $885 million fine signals the Swiss firm didn’t want to continue defending its bubble-era mortgage trading practices. The bank has wound down its investment-banking unit and returned its focus to more traditional bank activities in recent years.

While such fines may alter the industry’s future behavior, they will not necessarily do anything to ease the difficulties facing homeowners and the wrongfully foreclosed today. Even though foreclosures are down significantly compared to a year ago, millions of homeowners remain “underwater” on mortgages that cost more than their homes are worth. On Wednesday, government auditors announced that half of the mortgages modified under the government’s largest effort to stem the foreclosure tide have slipped back into default. Previous reviews have shown that a quarter-million Americans had their houses taken away unlawfully, banks continue to violate the provisions of a major settlement over wrongful foreclosures, and many individuals who received tiny payments under that settlement have declined to even cash the checks.