UBS could be the first of the European banks to pay up for misleading mortgage giants Fannie Mae and Freddie Mac over the quality of packaged mortgage backed securities sold leading up to the housing market crash.
According to Reuters, and multiple sources close to the situation, UBS has set aside approximately $1 Billion as a settlement for their lawsuit with Fannie and Freddie. For those who are unaware of which lawsuit I am referring to, allow me to elaborate.
As we all know, one of the major issues leading up to the housing market crash in 2008 was the issuance loans to under-qualified individuals. These “junk” loans were then packaged, or bundled, with other loans that were of slightly higher quality and sold off to investors. Now, on the surface this doesn’t sound too bad, but the reality is that these loans were being bundled with higher quality loans and being sold as a “high quality bundle” of loans when they really were not (essentially misleading investors about the risk involved in the bundles).
To make matters worse, not only were private investors gobbling these bundles up but institutional investors were as well; however, the biggest purchasers of these bundles were none other than our Government Sponsored Entities: Fannie Mae and Freddie Mac.
UBS represents 1 of 18 European Banks named in a lawsuit directed at recovering some of the losses incurred by Fannie and Freddie from purchasing misrepresented bundles of Mortgage Backed Securities (aka MBS).
So, UBS ponying up and preparing to hand over $1 Billion as a settlement is good right? Well, when one considers that Fannie and Freddie lost approximately $200 Billion from purchasing misrepresented MBS bundles, $1 Billion is not even a drop in the bucket (especially when UBS just released better than expected earnings for this past year!)
Only time will tell if this settlement goes through as it still only an agreement in principle at this point; but whether they accept it or not, the reality remains that Freddie and Fannie were both taken for fools, and lost hundreds of billions of Tax payers’ dollars.
This story will be updated as the deal unfolds.