The banks include Bank of America, Citigroup, Countrywide, JP Morgan Chase and others, according to a press release from the agency. The release explained the suits:

These complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933, similar in content to the complaint FHFA filed against UBS Americas, Inc. on July 27, 2011. In addition, each complaint seeks compensatory damages for negligent misrepresentation.

Certain complaints also allege state securities law violations or common law fraud.As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and conserving these companies’ assets and does so on behalf of taxpayers. The complaints filed today reflect FHFA’s conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings. Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities.

The agency oversees the troubled assets of Freddie Mac and Fannie Mae as part of the federal government’s move to shore up the housing market early on in the crisis. The agency argues that the banks knew, or should have known, that the mortgage securities they were bundling were based on fraudulent or bad loans. The lawsuits seek a total of $100 billion in fines and recovery from the banks.

“I am excited about the suit,” said Curtis Hertel, Jr, Ingham county’s register of deeds. “The reality is that there are both civil and criminal penalties on a lot of the banks’ illegal practices. I believe the corporations should be made to pay and their CEOs tried for the crimes committed. This is a step in the right direction and hopefully federal prosecutions will follow.”

But Steve Dibert, who runs the mortgage fraud investigation company MFI-Miami, is not as hopeful about the federal actions.

“It’s politics and next year is an election year. Fannie and Freddie are under attack based on falsehoods spread by conservatives who want them eliminated and by advocacy groups who have no background in lending. This lawsuit is an attempt to show that they are making an attempt to recoup losses,” Dibert said. “However, in my opinion this lawsuit is futile and won’t result in the settlements they think they are going to get. Even if they win, this lawsuit won’t put a dent in Fannie/Freddie’s mounting debts. Since Fannie/Freddie were taken over by the federal government they have become a dumping ground for toxic mortgages no one wants. When Treasury did that in 2007, they sealed the fate of Fannie/Freddie. It’s only a matter of time before a priest comes performs last rites.”

Dibert had very little positive to say about Fannie and Freddie and the housing market scandals.

“I would not be surprised if Fannie/Freddie knew this was going on, just like the servicers knew it was going on,” Dibert said. “No one figured they were going to get caught and they figured even if they did, no one will have the testicular fortitude to convict them. It’s like Captain Renault from Casablanca when Rick’s get raided by the Nazis: ‘I’m shocked to learn gambling is going on here!’ Then the attendant says, ‘Here are your winnings, sir.’”

This action comes as officials across the state have identified more and more questionable documents related to the foreclosure document. The questions arise from what is called robo-signing. This is where many people, under penalty of perjury in some instances, sign the same legal documents as part of documenting property sales.

Friday, the Associated Press reported that robo-signed documents dated back at least a decade.

Hertel has been a leading voice in the battle over robo-signed documents here in Michigan.

“I am not surprised that robo signing went back far. MERS [Michigan Electronic Registration System] was created in 1995 to stop filing many mortgage documents with Register of Deeds across the county,” Hertel said of the robo-signing revelation. “At that point banks stop caring about filing documents in the public record unless they had to. At that point documents that were never created had to be and it makes sense that robo-signing would be an issue.”

Dibert said the AP revelation is in line with his experience as well.

“MFI-Miami has found robo-signed documents going back to 2001 in Michigan and 1998 in other states,” Dibert said. “The discovery of robo-signing happened two years ago in Florida.”

Due to careful stewardship of the emergency programs, their effect on the deficit was much smaller than previously estimated. The Troubled Asset Relief Program (TARP) had outlays of just $9.0 billion in FY 2010, which was $25.9 billion or 74 percent below previous estimates from July 2010. Aid to Fannie Mae and Freddie Mac was $52.6 billion in FY 2010 — $16.4 billion or 24 percent less than the most recent forecast.

This played a large part in reducing the deficit, which as a percentage of gross domestic product (GDP) fell to 8.9 percent, down from 10.0 percent of GDP in FY 2009. This improvement — 1.1 percent of GDP — was the most rapid one-year improvement since FY 1987.

The takeaway: TARP worked and Fannie and Freddie did not need as much as the Treasury thought. Therefore, the deficit came in smaller than expected, at $1.294 trillion. That’s nine percent smaller and $122 billion less than last year.

But a smaller deficit is not necessarily a good thing — not during times of sustained, 9.6 percent unemployment. Democrats and most economists actually wanted a much bigger deficit, indicating massive government spending to juice the economy in the face of low aggregate demand. (Keynes, in simplified English: Because regular consumers aren’t buying things, employers are cutting payrolls. If the government buys things, employers will start hiring, meaning more consumers can buy more things, putting the economy back on track.)

The report shows that the government spent billions less on stimulus programs than it intended to, for a variety of reasons. Here are a few examples, comparing what the government actually spent with what it thought it would spend mid-year. (MSR stands for the Mid-Session Review of the FY 2011 Budget, which came out in July.)

• The MSR included an allowance for jobs initiatives, which reduced expected receipts by $1 billion. Delay in enactment of a job creation package increased FY 2010 receipts $1 billion relative to the MSR.
• Actual outlays for the Supplemental Nutrition Assistance Program were $2.1 billion lower than MSR estimates. Outlays for the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) were also lower by roughly $1.2 billion, as actual WIC participation and food costs were lower than expected.
• Outlays for the Department of Commerce were $13.2 billion, $2.7 billion less than the MSR estimate. Three-fifths of the difference is due to favorable performance of the 2010 Decennial Census, including higher-than-expected workforce productivity and a higher-than-expected Census questionnaire mail-back response rate that reduced the need for costly non-response follow-up operations, resulting in no need to tap contingency funds set aside for disasters or major operational failures.
• Outlays for the Department of Labor were $172.9 billion in FY 2010, $7.8 billion less than the MSR estimate. Most of the difference was due to lower-than-expected spending on unemployment compensation benefits, including Emergency Unemployment Compensation.
• Outlays for the Department of Transportation were $77.8 billion, $7.7 billion lower than projected in the MSR. The surface transportation programs, which were $6.0 billion below MSR projections, were affected by uncertainty due to numerous short-term program authorization extensions. The largest difference was in the Federal Highway Administration, where Federal Aid Highway program outlays were $4.4 billion below the MSR projection. In addition, Federal Transit Administration program outlays were $1.4 billion below expected levels. For these two programs, short-term authorizations limited States’ ability to obligate funds in a timely manner.
• Outlays for the Child Tax Credit and Making Work Pay Credit were below MSR estimates by $1.8 billion and $2.4 billion, respectively, as the state of the economy generally reduced taxpayers’ eligibility for these credits. These below-MSR outlays were partially offset by COBRA program outlays nearly $3.1 billion above the MSR estimate.

But the outlook looks grim for the bank — and especially when it comes to mortgages. This afternoon, about 40 state attorneys general are set to announce a joint investigation into widespread foreclosure fraud. Some analysts argue that the scandal could engulf every mortgage securitized — that is, bundled and sold to investors — in the last seven years. All in all, the crisis could cost banks tens of billions.

And J.P. Morgan’s statement reveals it is battening down the hatches. The company said it has set aside an extra $1.3 billion for possible legal costs. It also said it is carefully reviewing 115,000 mortgage affidavits in an earnings call. (CEO Jamie Dimon tried to reassure call participants by saying there is “almost no chance we made a mistake” with foreclosures.) And it revealed that it increased its mortgage-repurchase reserves by $1 billion. The bank uses that money, now more than $3 billion, to buy back bad mortgages it packaged and sold to investors or the government-sponsored entities, Fannie Mae and Freddie Mac. (Often, the investor makes the bank buy the mortgage back because the documents are faulty.)

That implies J.P. Morgan alone is preparing for a multi-billion-dollar fallout. Watch for other banks to do the same when they reveal their third-quarter earnings, this week and next.

Many smart people say we should. It seems increasingly clear that we must. For how long can the government prop them up? Are we never to have a private market in mortgages again?

Yet what happens if we let them fall? Arguably many banks would once again be “under water.”  Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.

I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck. Housing prices must fall, yet…housing prices must not fall.

Here is a very good Dave Leonhardt piece on two different views of housing. It’s where to go, if you are looking for the case for optimism. I am more pessimistic than David because I see the private sector interest in mortgage securities as remaining quite weak, which suggests the market knows which way prices have to move.

To try to answer Tyler’s first question: Years. The Obama administration has written a blank check to Fannie Mae and Freddie Mac, and the Federal Reserve continues to hold trillions in mortgage-backed securities. Reforming housing finance will take years, which means that those supports will remain in place for years.

To try to answer Tyler’s second question: We will. Republicans and Democrats alike want to back the government out of large portions of the mortgage market. A major part of reform will be clarifying, distinguishing and better planning for certain functions — like ensuring banks still offer fixed-rate, 30-year mortgages, or providing low-income housing — and ending other functions.

Either way, the problem militates for slow, moderate changes, rather than the dramatic removal of government supports that might cause prices to fall nationwide — rather than in certain places, like Arizona, Michigan and Nevada — and might tip the country back into a double-dip recession.

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve. “Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

[...]

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

This is all a little weird. First, the plunge in home sales was not really “unexpectedly deep.” Economists, including economists in the administration, knew perfectly well that the tax credits would pull sales from the summer into the spring. Second, some are “now” urging a dose of shock therapy? Barry Ritholtz, for one at least, notes, “I have been arguing for the government to step away from propping up the housing market for several years now.” Finally, even if the White House is out of ready chips, housing is probably on the precipice of small, localized price declines. And if housing does go south nationally again, the Obama administration could undertake measures like principal write-downs.

According to government data, 89% of single-family detached houses are owner-occupied. Meanwhile, 83% of apartments are rented. There is a certain logic to this. An apartment building provides an economy of scale for a landlord that a suburban housing development doesn’t.

The answer: Probably not individuals who cannot afford to own their homes and pay their mortgages anymore. (Of course, many individuals do rent out their homes. But it does require some work, and some willingness to deal with the hassle of it. What if the tenant breaks things? What if they do not pay their rent on time? Who do you go to for legal work? etc.)

The question becomes whether big rental companies and developers, with the credit to purchase lots of properties and the savvy to make a business of it, will be willing to step in. Of course, the government has all sorts of carrots to convince them to do so. And it seems many subsidized rental programs are going well, if they are oversubscribed.

But the recession has forced cuts to the program, meaning it serves far fewer families than need it. Katz writes about the panic the shortage has created:

[I]n a suburb of Atlanta last week, the near-riot took place in a very, very long line, estimated at 30,000 people or more, for a government rent-aid program. … The applicants converged at a shopping plaza in East Point, just south of Atlanta, in the hope of obtaining a copy of the coveted form. East Point is a quick train ride from Atlanta, where voucher waiting lists have been closed for years. Wednesday’s release of applications for East Point’s 455 available vouchers drew a crowd from all over the region and even out of state, a mass of people almost the size of the entire population of East Point itself. Those at the head of the line had begun to gather days earlier.

But it’s not just low-income families that benefit from the program. More vouchers might improve housing market overall, making them an even better public subsidy:

Neighborhoods south of downtown Atlanta have been decimated by foreclosures, with abandoned houses sprouting kudzu on virtually every block. Real-estate investors are buying these homes in bulk from lenders or at courthouse auctions for pennies on the dollar and fixing them up, hoping to rent them out to Section 8 voucher families. …

In Atlanta, investors can potentially get an annual Section 8 income of $10,000 or $15,000 a year for houses that currently sell for little more than that. Voucher holders can browse on gosection8.com to look at current listings, like an attractively renovated two-bedroom house that an investor bought at a foreclosure auction for $17,000 in May and is now trying to rent at $895 a month. These real-estate investors are counting on a steady supply of customers.

JoAnne Allen at Reuters reports that Rep. Barney Frank (D-Mass.), one of the key players working on housing reform, argues blankly that the two should die:

“They should be abolished,” Frank said in an interview on Fox Business, when asked whether the mortgage giants should be elements in housing market reform. “They only question is what do you put in their place,” Frank said.

The Federal Housing Administration should be fully self-financing and Freddie and Fannie should be replaced with a new mechanism to help subsidize housing, Frank said in the interview.

“There is no more hybrid private-public,” the Massachusetts Democrat suggested. “If we want to subsidize housing then we could do it upfront and let the budget be clear about that.”

Fannie Mae and Freddie Mac were government-sponsored enterprises, privately owned companies supported by the government, until the Bush administration took control of the companies in 2008 to save them from collapse.

Frank said that he does believe the federal government should have a role in building affordable rental housing but thinks money should go toward projects by private developers.

On the question of whether the government should still provide some guarantees in the mortgage market, Frank said: “If we have it (guarantees), it has to be self-financed by the people who are benefiting.”

Essentially, Frank argues that the government needs to clarify the government’s housing goals and better arrange funding flows to meet them. This is a point Timothy Geithner, the Treasury secretary, made yesterday, as well.

Matthew Yglesias does a good job of describing the problem: Before, Fannie and Freddie was encouraging people to buy more expensive houses, subsidizing all kinds of mortgages, competing with private companies, and taking on certain low-income housing goals. Their tasks became muddled, in part because their mission was muddled, as profit-seeking entities with a government mission and government backing.

Yesterday, the Treasury Department held a conference on the “Future of Housing Finance.” The summit — drawing together major governmental, housing-industry research and private-industry figures — came as the Obama administration develops a plan to overhaul Fannie Mae and Freddie Mac, the government-sponsored enterprises that have required a $150 billion taxpayer bailout thus far. The participants came from a wide variety of viewpoints. But all recognized that the days of the government boosting homeownership for all are over. Mark Zandi, the chief economist for Moody’s Analytics, put it this way: “Not everyone can or should have a single-family home.”

[Economy1] That stands in stark contrast to the policies of the Bush administration, and administrations prior to it. Eight years ago, President George W. Bush told a crowd in Atlanta, Ga., “I do believe in the American Dream. I believe there is such a thing as the American Dream. And I believe those of us who have been given positions of responsibility must do everything we can to spotlight the dream and to make sure the dream shines in all neighborhoods, all throughout our country. Owning a home is a part of that dream, it just is. Right here in America if you own your own home, you’re realizing the American Dream.”

Today, such a line of argument sounds little better than absurd. In the 2000s, innovations in housing finance let many Americans with low incomes or tarnished credit purchase a home. But too often, that home fell far outside their price range. Often, lenders offered them contracts for no money down, with complicated fees and variable interest rates. Banks and financial companies encouraged homeowners to take out products like home-equity loans, designed to encourage homeowners to see homes as piggy banks rather than a place to live.

When the housing bubble burst, those homeowners — millions of them — could not make their mortgage payments. Many ended up underwater, owing more on the mortgage than the home was worth. That meant they could not sell the house to move somewhere cheaper — or somewhere with more jobs — without owing the bank a check. The second liens made the problem worse, leaving families more in debt. Banks repossessed 860,000 homes in 2008, 918,000 in 2009 and are on track to repossess more than 1 million this year. For the millions of families who have lost their homes, dreams turned to nightmares.

In the wake of this housing disaster, federal policymakers are seeking to keep the housing market afloat — meaning encouraging people to buy houses — while trying also to reform how housing finance works, pulling the government away from backstopping the entire mortgage market. The conference touched on myriad subjects — most notably, what to do with Fannie Mae and Freddie Mac, currently backing about three-quarters of home purchases. But it also touched on how to separate the goal of promoting homeownership for low-income Americans — a goal itself under question — from broader questions about the role of government in housing finance.

At the Treasury summit, Ellen Seidman — an executive vice president at ShoreBank, a community-development focused bank holding company —  highlighted the housing woes of low-income Americans after the bubble burst. She noted that some 18.6 million households spend more than half of their income on housing — one in four renters, and one in eight owners. Just a quarter of households eligible for federal assistance for rent receive that income. And in most places, families need multiple minimum-wage jobs to meet a standard rental price.

She argued that the government needs to remain involved in helping qualified low-income families receive home loans. And she argued that the Dodd-Frank financial regulatory reform bill and ongoing consideration of Fannie and Freddie might actually kill efforts to help low-income families access home loans, “because they’re ridding the market” of institutions providing liquidity to that segment of the market.

Treasury Secretary Timothy Geithner agreed. In a prior speech, he noted: “We need to delineate more clearly the public policy goals of how best to promote reasonably priced and stable mortgage costs for most Americans from how best to provide access to affordable housing for lower income Americans.”

At one of the conference’s panels, participants noted that the government needs to scale back. “The government’s role in housing needs to be pulled back quite significantly, certainly compared to where it is today, but also compared to where it was prior to the crisis,” Zandi argued. But he noted the plight of low-income homeowners. “When housing values are falling, nothing works well in our economy. The home is still the largest asset on most people’s balance sheet.”

Lew Ranieri, the “godfather” of mortgage finance and a former Wall Street executive said, “a need to expand homeownership” drove the crisis, but “it was much more the profit motive than any political motive to expand homeownership” that led to the proliferation of bad mortgage products. To that end, he argued that the Dodd-Frank financial regulatory reform law makes a major omission in not addressing second liens. He argues the government needs to regulate “home as shelter, not as a credit account.”

Bill Gross, the cofounder of PIMCO and a major bond investor, believes that “full nationalization” of Fannie and Freddie will be necessary: That the government is the housing market, and needs to remain so. “To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” he said.  “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Reform will prove difficult and will happen slowly because Fannie and Freddie control or backstop so much of the housing market. The two entities guarantee about three-quarters of mortgage-backed bonds — and the government backstops all but just 3 percent of mortgages. Reform them too quickly, and risk cratering the nascent, if extant, housing recovery. “It’s like building an airplane while you’re still flying it,” said David Ledford of the National Association of Home Builders told Bloomberg.

But politicians are eager to make clear they have every intention of returning housing risk to the private market. In his opening remarks, via Politico, Treasury Secretary Timothy Geithner says:

“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country. … We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support.

“We will not support a return to the system where private gains are subsidized by taxpayer losses. We need to delineate more clearly the public policy goals of how best to promote reasonably priced and stable mortgage costs for most Americans from how best to provide access to affordable housing for lower income Americans. […] The failures that produced the system we have today were bi-partisan. The solution must be as well. This is a test for Washington. The stakes are high. The housing industry supports millions of jobs. For many Americans, their home is their largest financial asset.”