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State sues for answers from Fannie Mae, Freddie Mac on housing meltdown

Federal officials say Atty. Gen. Kamala D. Harris has no jurisdiction in her attempt to learn details about mortgage giants' handling of homes owned in California.

December 21, 2011|By Alejandro Lazo, Los Angeles Times
  • California Atty. Gen. Kamala D. Harris at a press conference earlier this month.
California Atty. Gen. Kamala D. Harris at a press conference earlier this… (Luis Sinco / Los Angeles…)

California Atty. Gen. Kamala D. Harris is suing Fannie Mae and Freddie Mac to force the mortgage giants to answer questions about their role in California's housing meltdown.

In two suits filed Tuesday in San Francisco County Superior Court, Harris seeks to compel the companies to respond to subpoenas from her office that have been ignored so far. Harris is seeking information about the practices by Fannie and Freddie in California as part of her ongoing investigation into the mortgage industry.

The suits ask a judge to order the two companies to answer a set of 51 questions served in November to each government-controlled company. The firms have refused to answer the questions, the suits allege, because the federal agency that oversees them says federal law preempts the state from issuing subpoenas to the two companies.

The requests from Harris' office include questions over whether California homes owned by Fannie and Freddie are dens of drug-dealing and prostitution, and seek details about the companies' roles in issuing, selling, sponsoring and marketing mortgage-backed securities to state agencies.

"Many of those securities are now virtually worthless, and there have been serious accusations of fraud in connection with them," Harris alleges in her suits. The suits also argue that "the mortgage and foreclosure crisis has had a devastating impact on the people of California."

California's legal push to pursue an investigation into the two companies comes after the Securities and Exchange Commission last week, in twin lawsuits, accused six former Fannie and Freddie officials of misleading investors and the public about their investments in subprime mortgages. The two companies were placed under federal conservatorship in 2008 as losses from the companies threatened to topple them and imperil the nation's mortgage finance system.

The suits by Harris allege that she has the right to issue the subpoenas to the two companies because she is not trying to regulate the two institutions, but rather is "gathering information by posing questions to a percipient witness."

The suits also allege that the properties owned by the companies are subject to state law and that it is the state's role to abate "public nuisances and investigate and prosecute crimes committed at foreclosure properties in California."

Spokesmen for Fannie and Freddie declined to comment, as did a spokeswoman for their regulator, the Federal Housing Finance Agency.

In a letter mailed to Harris' office this month that was included in the suits as evidence, the housing finance agency, through outside counsel, argued that the questions posed by California are "frequently vague and ambiguous and appear to seek a voluminous amount of information."

The letter also asserts that states have no right to subpoena the companies because federal law preempts local jurisdictions. The letter, which points to the Housing and Economic Recovery Act of 2008, argues that Congress sought to preempt such actions by states. It asks Harris to revoke the subpoenas.

Kurt Eggert, a law professor at Chapman University in Orange, disagreed with the interpretation by the federal agency.

"The state of California can't tell the feds what to do, but they are not trying to tell the feds what to do; they are trying to tell Fannie and Freddie what to do," Eggert said. "It's a novel question, of what the states can do, and will revolve on a very close reading of law that was passed when they weren't really thinking about this issue."

The suits by Harris are an escalation of her efforts to investigate the mortgage industry's role in causing the state's housing crisis. Her office also issued subpoenas to determine whether Bank of America and its Countrywide Financial subsidiary sold investments backed by risky mortgages to institutional and private investors in California under false pretenses, The Times has previously reported. Similar subpoenas have also been issued to Citigroup Inc. and its banking subsidiary, Citibank.

Harris' office is also investigating whether major banks and other mortgage industry players have abused California homeowners through their mortgage servicing and foreclosure practices.

Harris, in September, walked away from discussions involving the nation's five largest mortgage servicers and a coalition of attorneys general and certain federal agencies. Those ongoing talks were expected to have delivered a settlement of more than $20 billion but have dragged on for more than a year and have been stymied by concerns from certain attorneys general that the negotiated deal was likely to let the banks off too easily.

Further dividing those efforts, Harris announced this month that she would team up with Nevada Atty. Gen. Catherine Cortez Masto, who has also said publicly that she would forge her own path. Masto last week sued Florida-based Lender Processing Services Inc., a foreclosure out-servicing company that handles a large chunk of foreclosures for the nation's largest banks. Harris is also investigating LPS' activities in California.

alejandro.lazo@latimes.com

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