Mortgage scandal boosts investors' campaign to get banks to buy back securities

Since the financial crisis broke out two years ago, unhappy investors in mortgage securities have struggled to organize themselves and achieve a common goal - force big banks to buy back loans that went bad because of shoddy lending practices.

This StoryFull coverage: Foreclosure system in chaosTimeline: Foreclosure debacle

Now, widespread reports of the banks botching their loan paperwork have breathed new life into the efforts by investors, and they say they are organizing their most aggressive legal offensive yet against the biggest bank in the country, Bank of America.

Once run by a loose group of hedge funds, the investors' campaigns have bulged in size in recent weeks, turning them into a force that could recoup tens of billions of dollars from Bank of America and other large lenders and act as a major drain on their earnings.

Previously, this group struggled to force the banking industry to hand over data critical to their lawsuits. Now with the Federal Reserve Bank of New York, the regulator of mortgage giants Fannie Mae and Freddie Mac, and some of the world's largest funds on board, the investors may be able to compel banks to reveal more about their lending practices.

The newly energized investors present a troubling scenario for the big banks that packaged loans and sold them as securities. On top of fighting off lawsuits from homeowners seeking to challenge foreclosure proceedings, these companies could face months of bitter and costly litigation as angry investors finally unite.

On Wednesday, a team of attorneys leading the charge is holding a conference in New York about failures by banks to properly service loans and their practice of hiring "robo-signers" who signed off on thousands of foreclosure files each month without verifying their accuracy.

The prospect of more lawsuits has already spooked Wall Street. On Monday, Bank of America's stock hit a 52-week low.

"If you think about people who come back and say, I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cyclinder, we're not putting up with that," said chief executive Brian T. Moynihan in an earnings call last week. "We will diligently fight this."

Still, the foreclosure debacle represents a turning point for mortgage investors who have long accused banks of misrepresenting the mortgages they issued. For instance, some investors have accused banks of overstating how many loans were taken out by borrowers using their properties as primary residences, which made the mortgages seem less risky than they actually were.

The robo-signer issue is one more piece of evidence, say investors, that the banks have failed to keep their end of the bargain.

"I think the robo-signers are a battle in a long war," said Bill Frey, chief executive of Greenwich Financial, which filed a suit in 2008 against Countrywide, now owned by Bank of America.

So far, investors have faced two major hurdles in their battle against the banks.

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Treasury: Will begin selling mortgage securities

WASHINGTON -- The Treasury Department announced Monday that it will begin selling its remaining $142 billion in holdings of mortgage-backed securities purchased during the financial crisis.

Treasury officials said the first sales of up to $10 billion in the securities, primarily issued by troubled mortgage companies Fannie Mae and Freddie Mac, would start this month.

Assistant Treasury Secretary Mary Miller said the sales represented a continuation of efforts by the government to wind down the emergency programs put in place in 2008 and 2009 to help restore market stability.

Treasury estimated it could bring in an additional $15 billion to $20 billion over what it paid for the $142 billion in mortgage-backed securities it currently holds. However, that amount would still leave the government with heavy losses from the rescue of Fannie and Freddie in September 2008.

The final cost of the bailout of the two companies has been estimated to be as high as $259 billion, making it by far the government's costliest rescue operation during the financial crisis.

Treasury has retained State Street Global Advisors to manage the sales of its mortgage-backed securities. Officials said they would post an accounting of the sales at the end of each month on Treasury's web site.

The program was designed to stabilize the market for mortgage-backed securities, which investors had started to flee as defaults in the mortgage market began to escalate. Treasury announced in December 2009 that it was halting the purchase of new securities under the program. At the time it had purchased a total of $220 billion worth of mortgage-backed securities.

Treasury said in its announcement Monday that the market for mortgage-backed securities had "notably improved" since 2008 and 2009.

In a fact sheet, Treasury said it planned to sell up to $10 billion of its $142 billion in mortgage-backed securities per month. At this pace, Treasury said the whole portfolio would be disposed of in about one year. But Treasury said if market conditions change, it is possible it will take longer to fully exit from the program.

Treasury said it believed the sales could take place with a "minimal impact" on home mortgage rates.

Treasury said that the announcement to sell the remaining holdings of mortgage-backed securities was not related to the impending battle over the debt limit. Treasury's latest estimate is that the government will reach the current $14.3 trillion borrowing limit between April 15 and May 31.

Republicans are demanding steeper cuts in government spending before they will agree to raise the debt limit. Treasury Secretary Timothy Geithner has warned that failure to raise the borrowing limit would trigger an unprecedented default by the government on the national debt which would drive up the government's borrowing costs.

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