First Horizon Closes FHFA Lawsuit for $110M - Analyst Blog

First Horizon National Corporation FHN ended the legal tussle it was embroiled in since 2011 with the Federal Housing Finance Agency (FHFA) – the conservator for Freddie Mac FMCC and Fannie Mae FNMA. The company announced a lawsuit settlement for $110 million related to the sale of mortgage back securities to these government sponsored enterprises prior to the financial crisis.

First Horizon will pay $61.6 million to Fannie Mae and $48.4 million to Freddie Mac. Notably, the settlement will not lead to any adjustment in the first-quarter results that the company recently reported. Also, second-quarter results may not be impacted as the company claims to have sufficient reserve and some insurance for this settlement.

The Probe

Many financial institutions resorted to inappropriate, misleading, aggressive and fraudulent methods to boost their mortgage operations during the pre-crisis period that fueled the sub-prime mortgage crisis. Consequently, Freddie Mac and Fannie Mae reached the brink of bankruptcy and the government intervened to rescue these lenders.

In order to avoid such fatal scenarios in the future, the regulators started implementing stringent regulations and in 2011 the FHFA sued 18 financial organizations including First Horizon for selling faulty mortgage-backed securities to Freddie Mac and Fannie Mae that caused investors severe losses.

FHFA alleged that First Horizon have violated Federal and District of Columbia securities laws while it sold private-label mortgage-backed securities to Fannie Mae and Freddie Mac during the period before the financial crisis. Notably, in 2008, First Horizon exited from its national mortgage businesses.

In Conclusion

This marks the 14th settlement of the 18 PLS (private-label securities) lawsuits that FHFA filed in 2011. Recently, Barclays PLC BCS reached a settlement with the FHFA for $280 million owing to this PLS lawsuit. The FHFA continues to exhibit efforts in successfully resolving the issues and safeguarding the interest of investors.

The company currently carries a Zacks Rank #3 (Hold).