Memphis-based First Horizon and its subsidiary First Tennessee Bank, a stellar name in Tennessee business for more than a century, has been sued by federal regulators for its role in the once-popular investment scheme called "Pass the Mortgage."
First Horizon was sued for $883 million last week by the federal housing regulator known as the Federal Housing Finance Agency (FHFA). The agency says that between 2005 and 2007, First Horizon packaged mortgage-backed investments and sold them, minus full disclosure, to taxpayer-backed Fannie Mae and Freddie Mac.
First Horizon, with $25 billion in assets, is in some fast company. Also sued were 16 other financial firms, including Bank of America ($2.5 trillion in assets), Citigroup, Goldman Sachs, and J.P. Morgan Chase & Co. A front-page story in The Wall Street Journal Saturday called them "17 of the world's biggest financial institutions."
The charge: First Horizon and its subsidiaries were on an expansion kick from 2005 to 2007 and packaged mortgages into sellable securities without divulging the poor credit quality of some of them.
"Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans," reads the FHFA lawsuit.
"The Registration Statement contained statements about the characteristics and credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investor's decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false."
Among the individuals named in the lawsuit are Gerald "Jerry" Baker, CEO of First Horizon from 2007 to 2008 when he retired after a quarter in which the company lost $19 million, and Charles Burkett, who retired in June 2011 as president of banking at First Tennessee.
The 77-page lawsuit was filed in federal court in New York. A representative from First Horizon says the company will defend the lawsuit.
The securities were issued "in an effort to increase revenue and profits in a rapidly expanding market. In 2005, First Horizon securitized $892 million in mortgage loans and in 2006, that figure nearly doubled to $1.74 billion."
This meant higher fees, salaries, commissions, and bonuses for all involved, at least until the housing market crashed along with First Horizon's stock price in 2007. First Horizon hit $37 in 2007 but was trading at $6 this week.