Fannie Mae, Freddie Mac, & Due Diligence Failures: Should Comparative Responsibility be Imposed on a GSE’s Claims Brought Under Sections 11(a) & 12(a)(2) of the Securities Act of 1933?

Abstract

During the financial crisis Fannie Mae and Freddie Mac lowered their underwriting standards and due diligence requirements for qualifying mortgages and mortgage-backed securities. Currently, the FHFA, their conservator, has filed claims under sections 11(a) and 12(a)(2) of the Securities Act of 1933 against many of the largest banks claiming a material misrepresentation or omission occurred on the registration statement and prospectuses of securities purchased by Fannie and Freddie. Under current law, those associated with the registration statements and prospectuses will be held to near strict liability. This note argues that a comparative-responsibility standard, due to Fannie Mae and Freddie Mac’s status as government-sponsored entities should be applied when allocating responsibility for good-faith errors under sections 11(a) and 12(a)(2).