UBS Leads Wall Street Bid to Halt FHFA Mortgage Bond Suit

UBS AG is seeking to block a U.S. lawsuit over billions of dollars in mortgage bonds in a case that could set back government efforts to recover losses Fannie Mae and Freddie Mac incurred in the housing crisis.

UBS is set today to argue that the U.S. Court of Appeals in Manhattan should overturn a lower-court ruling allowing the Federal Housing Finance Agency to pursue its lawsuit over losses on $6.4 billion in mortgage bonds sold to the two mortgage-finance companies.

At issue on appeal is whether the 2008 law that established the agency, which regulates Fannie Mae and Freddie Mac, also extended the time the government had to file claims against Zurich-based UBS and a group of other lenders.

“It’s highly politicized,” said Dan Flanigan, chairman of the financial services and real estate practices at law firm Polsinelli Shughart. “There will be huge pressure on all these courts—not that they’ll be able to acknowledge—but huge political pressure not to let these banks off the hook.”

The FHFA sued UBS and more than a dozen other banks, including JPMorgan Chase & Co., Barclays and Goldman Sachs Group Inc., over mortgage securities sold to Fannie Mae and Freddie Mac. Four years after the financial crisis, banks are still grappling with liability tied to mortgage lending as investors and government authorities pursue claims and negotiate settlements.

Stefanie Johnson, a spokeswoman for the FHFA, declined to comment about the hearing. Megan Stinson, a UBS spokeswoman, didn’t respond to an email seeking comment.

Other lenders that FHFA sued have sided with UBS and asked the appeals court to overturn the lower-court ruling. If not reversed, the ruling allowing the case to proceed against UBS will have “an enormous impact,” exposing them to federal and state securities law claims “long after Congress and the relevant state legislatures determined that such claims should have expired,” the banks said in court papers.

An appeals court decision on the timeliness of the government’s claims will “remove a cloud of uncertainty that hangs over” the other cases against the banks, said U.S. District Judge Denise Cote in Manhattan, who ruled against UBS and said the case could proceed.

FHFA, which placed Fannie Mae and Freddie Mac into conservatorship in 2008, sued UBS in July 2011 and then followed with lawsuits against 17 financial institutions in September 2011. The agency claims that loans backing securities sold to Fannie Mae and Freddie Mac were riskier than promised, leading to losses. The original amount of securities at issue in the cases is about $200 billion, according to the agency.

UBS, which says FHFA “sat” on its claims, argues the case should be dismissed because the claims expired in 2010 and are time-barred by the so-called statute of repose, according to court filing.

“This appeal involves a belated attempt by the two largest and most sophisticated issuers and purchasers of MBS in the world to shift blame for losses they suffered as a result of the nationwide housing crisis in which they played a critical role,” the bank said in its brief filed with the appeals court. “Their attempt, however, comes entirely too late.”

Cote, the district court judge, rejected the bank’s argument in a decision in May. Cote said the law establishing the FHFA—the Housing and Economic Recovery Act of 2008—gave the agency three years from when it became conservator of Fannie Mae and Freddie Mac to bring its securities law claims.

UBS’s argument is based on a “narrow” reading of the law that would “undermine” congressional purpose in passing the legislation, Cote said.

Barring the FHFA from pursuing claims “would defeat the very purpose” of the 2008 law, which was intended to give it time to investigate and assert claims to recover money for Fannie Mae and Freddie Mac, the agency said in a filing with the appeals court.

“FHFA would be severely constrained in its ability to accomplish its mission and to recover amounts” for the companies and ultimately taxpayers if it remained subject to time bars “of whatever type,” the agency said.

The Securities Industry and Financial Markets Association, a Wall Street lobbying group that has sided with UBS, said Cote made a “policy judgment” in allowing the claims to proceed.

“When courts rewrite statutes based on intuitions as to what Congress would have preferred to have said, uncertainty and arbitrary decisions result,” the group said in a filing with the appeals court.

Flanigan, who isn’t involved in the cases, said he expects the matter to be appealed to the U.S. Supreme Court.

“The statute is ambiguous and both sides are able to point to some persuasive authority for their position,” he said.