Fannie and Freddie: Duped by Big Banks?

While everyone discusses the likelihood that Fannie and Freddie were duped into buying subprime mortgages that didn't meet their investing criteria, we may finally get a definitive answer when banks answer the 64 subpoenas issued this week by the Federal Housing Finance Agency. The agency didn't release the names of the banks subpoenaed, but The Wall Street Journal did speculate on the likely recipients.

Fannie and Freddie gobbled up these securities in huge numbers starting in 2005. These securities held triple-A ratings when sold. Now the FHFA wants to take a closer look at what types of loans were actually placed in these securities and whether or not they truly deserved those high ratings.

"By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the Enterprises and the taxpayers," FHFA acting director Edward J. DeMarco said in statement when he announced the subpoenas.

While he didn't say what the FHFA would do if they find breaches, the lawsuit filed by the Federal Home Loan Bank of San Francisco certainly shows what can be done.