NEW YORK (
) -- The Federal Deposit Insurance Corp.'s three lawsuits filed on Friday against a group of large banks could be the tip of the iceberg.
The FDIC -- as receiver for two failed banks -- filed three lawsuits last Friday against a group of large mortgage securitizers seeking $92 million in relief, plus attorney fees and other expenses.
But while that may seem a paltry sum for the large banks being sued, the FDIC may be pursuing many more similar cases in the very near future.
As receiver for Citizens National Bank of Macomb, Ill, and Strategic Capital Bank of Champaign, Ill., which both failed on May 22, 2009, the FDIC filed a complaint in the U.S. District Court for the Southern District of New York, seeking $66 million in damages against a large number of banks and subsidiary companies that played different roles in securitizing 19 mortgage pools. The defendants include subsidiaries of Bear Stearns, which was acquired by
in 2008, and subsidiaries of
; Merrill Lynch, which was acquired by
Bank of America
, and subsidiaries of
Royal Bank of Scotland
The FDIC as receiver for Strategic Capital Bank filed a separate complaint in New York, seeking $11 million in damages over four mortgage securitizations, against subsidiaries of JPMorgan Chase, Citigroup, Bank of America and Deutsche Bank.
The agency as receiver for Strategic Capital Bank filed suit in California against subsidiaries of Countrywide Financial, which was acquired by Bank of America in 2008, along with a subsidiary of Citigroup, and Bank of America itself, seeking $15 million in damages.
The lawsuits highlight a complicated array of mortgage securitization problems, with many different parties to blame.
According to the New York filings, the securitizers made "material untrue or misleading statements" about more than half of the loans in each of the securitized pools.
While an FDIC spokesman confirmed that the agency had filed the lawsuits, the agency's policy is not to comment on pending litigation.
Frank Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP, in the firm's Philadelphia office -- says "it is unusual that the FDIC is bringing actions against other banks," as "historically they have been reluctant to do that."
"They must feel that there is a highly credible basis to believe these failed banks were victims of misrepresentations or negligence or something more intentional regarding disclosure of risk," with the possibility that "the appraisal methodology was inconsistent with the regulations."
Mayer says "you have a three-year statute of limitations coming up," for many lawsuits related to bank failures, so it is reasonable to expect the FDIC to file a large number of additional lawsuits, quickly.
The FDIC said in the first court New York court filing listed above, that the offering prospectuses included statements that were "untrue or misleading," about the loan-to-value ratios of the loans, and property appraisals. According to the FDIC, some of the home values were "overstated to a material extent."
What greatly complicates these lawsuits, according to Mayer, is the question of "whose fault is it?" Appraisers may have been at fault, but for many "conforming loans" -- those which would be eligible for sale to
, but could also have been privately securitized -- a "mere desk review or an automated review" was permitted by regulators, according to Mayer, which puts some of the blame squarely on the government.
According to the FDIC's complaint, there was "undisclosed upward bias" in appraisal values, because some of the appraisals didn't conform "to the Uniform Standards of Professional Appraisal Practice."
According to the FDIC, the MBS offering prospectuses also failed to disclose "additional liens" on many of the loans, understated the number of collateral properties that were not primary residences, and made "untrue or misleading statements about the underwriting standards of originators of the mortgage loans."
Mayer says "the FDIC must have a basis to believe that the institutions that bought the securities didn't understand the appraisal weaknesses, because
the risk disclosed to the victim banks was not described well enough."
Since the securitizers didn't play every role in the loan application, underwriting, appraisal and loan approval processes, the FDIC's lawsuits promise to be extremely complicated affairs.
The agency is pursuing many other avenues to recover losses to the deposit insurance fund, including professional liability lawsuits, suing a total of 549 individuals, in connection with 63 bank and thrift failures, from 2009 through May 15 of this year. The lawsuits have included 29 attempts to recover from directors and officers insurance policies, 239 suits against former bank and thrift directors and officers, "33 other lawsuits for fidelity bond, insurance, attorney malpractice, appraiser malpractice, and RMBS claims," and "143 residential mortgage malpractice and fraud lawsuits are pending, consisting of lawsuits filed and inherited."
Thorough Bank Failure Coverage
There have been 24 bank and thrift failures so far during 2012, with a total of 436 institutions failing since the beginning of 2008.
The most recent bank to fail was
of Sylacauga, which was shuttered by the Office of the Comptroller of the Currency on Friday.
All previous bank and thrift closures since the beginning of 2008 are detailed in
interactive bank failure map:
The bank failure map is color-coded, with the states having the greatest number of failures highlighted in dark gray, and states with no failures in light green. By moving your mouse over a state you can see its combined 2008-2011 totals. Then click the state to open a detailed map pinpointing the locations and providing additional information for each bank failure.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.