So why didn't Allstate and the other aggrieved investors try to piggyback on to the FHFA lawsuits, in various class actions? Because the Housing and Economic Recovery Act of 2008 allowed Fannie and Freddie to overcome the barriers that limit the ability of ordinary investors to seek redress under Federal securities laws.
Well before the government takeover in September 2008, the GSEs, like many other investors, sought access to the loan file data in these various deals. Fannie and Freddie wanted to find out if investors' rights--for loan putbacks and other remedies--were being adequately enforced by servicers and trustees. These efforts to access information went nowhere.
So finally, in July 2010, the FHFA started issuing subpoenas, as authorized by the 2008 Act . Other investors, who were subjected to the same stonewalling, had no comparable subpoena power. Also, the FHFA had more time to develop the cases. Under the 2008 Act, the three-year statute of limitations for Fannie and Freddie began running on September 8, 2008, the day of the government takeover. For most everyone else, the statute of limitations began running on the dates that the bonds were issued in 2005 through 2007. Almost all of the FHFA lawsuits were filed just under the wire, on September 2, 2011.
Nonetheless, buyers of subordinate tranches of private label RMBS owe Fannie and Freddie a debt of gratitude. Because someone went to the trouble to fully document the basis for their legal damages, ordinary investors have some certainty as to what they would have recovered, but for the barriers that limit enforcement of their legal protections. You have to wonder if major banks would have remained solvent if the rule of law were applied equally to everyone.
[Modification inserted chart and corrected typos.]
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