835
Fannie Mae, Freddie Mac, and Due-
Diligence Failures: Should Comparative
Responsibility Be Imposed on a
Government-Sponsored Entity’s Claims
Brought Under Sections 11(a) and
12(a)(2) of the Securities Act of 1933?
Alexander S. Bonander
ABSTRACT: In the lead up to the 2008 financial crisis, Fannie Mae and
Freddie Mac lowered their underwriting and due-diligence standards for
qualifying mortgages and mortgage-backed securities. Currently, the Federal
Housing Finance Agency, their conservator, has filed claims under sections
11(a) and 12(a)(2) of the Securities Act of 1933 against many of the
nation’s largest banks. The Federal Housing Finance Agency claims that a
material misrepresentation or omission occurred in the registration
statements and prospectuses of securities purchased by Fannie Mae and
Freddie Mac. Under current law, the security issuer will be held to strict
liability and those parties 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’s and Freddie
Mac’s unique status as government-sponsored entities—should be applied
when allocating responsibility for errors under sections 11(a) and 12(a)(2).
I. THE FEDERAL HOUSING FINANCE AGENCY SUES THE NATION’S
LARGEST BANKS ..................................................................................... 837
II. GROWTH OF THE RESIDENTIAL-MORTGAGE INDUSTRY .......................... 839
A. HOME MORTGAGE LENDING ENVIRONMENT FROM 2000 TO 2006 ..... 839
B. SECURITIZATION AND THE ORIGINATE-TO-DISTRIBUTE MODEL ........... 841
C. FANNIE MAE AND FREDDIE MAC AND THEIR ROLE IN THE CRISIS ........ 842
J.D. Candidate, The University of Iowa College of Law, 2013; B.A., Luther College,
2009. I would like to thank the editors and writers of Volumes 97 and 98 of the Iowa Law Review
for their work. I would also like to thank my parents for their continued support.
836 IOWA LAW REVIEW [Vol. 98:835
III. FANNIE’S AND FREDDIE’S SUBPRIME COURSE OF CONDUCT .................. 844
A. REGULATORY AND EXECUTIVE PRESSURE CONFRONTING FANNIE AND
FREDDIE ........................................................................................... 845
B. CONGRESSIONAL PRESSURE CONFRONTING FANNIE AND FREDDIE ........ 849
C. PRIVATE INDUSTRY AND SHAREHOLDER PRESSURE CONFRONTING
FANNIE AND FREDDIE ........................................................................ 851
D. SECURITIES AND EXCHANGE COMMISSION LITIGATION ....................... 853
IV. SECTIONS 11(a) AND 12(a)(2) OF THE SECURITIES ACT OF 1933 ........ 854
A. RELEVANT PROVISIONS OF SECTIONS 11(a) AND 12(a)(2) .................. 854
B. INADEQUACY OF ISSUER-ONLY STRICT LIABILITY ................................ 856
V. A NEW WAY FORWARD: COMPARATIVE RESPONSIBILITY......................... 857
A. COMPARATIVE RESPONSIBILITY: AN EQUITABLE ALLOCATION OF
LIABILITY ........................................................................................ 858
B. COMPARATIVE RESPONSIBILITY: A CHECK ON GSES ........................... 859
1. Reduction of Systemic Market-Failure Risks ........................ 859
2. Promotion of Robust Mortgage-Underwriting Standards ... 860
3. Promotion of Investment Due Diligence ............................. 861
VI. CONCLUSION ......................................................................................... 861
