Occasionally, investors need a reminder of why nobody makes good investment decisions when blindly betting.  Recently, there have been two prominent reminders.

First, there is the FHFA’s lawsuit with Nomura and Royal Bank of Scotland (RBS) over misrepresentations about the underlying mortgages in securities these firms sold to Fannie and Freddie before the financial crisis.  The FHFA argues had these misrepresentations not been made and instead there had been transparency into the underlying mortgages, the securities would not have been purchased and the subsequent losses not incurred.

And what were these misrepresentations?  The bankers who sold the securities appeared to have a different opinion about their quality than did the offering document.  As reported by Reuters,

In 2007, a Royal Bank of Scotland Group Plc employee emailed his boss with his view of a sample of mortgages underlying a bond that the bank was underwriting: “This one is crap.”…

The messages add to a litany of arguably embarrassing electronic musings by bank employees that have resurfaced in litigation over the 2008 financial crisis.

Private plaintiffs and U.S. regulators alike have seized upon internal emails from the likes of JPMorgan Chase & Co and Deutsche Bank AG calling the mortgage products they sold investors “lemons,” “junk,” and “pigs.”

Naturally, the notion you need transparency in order to make good investment decisions has featured prominently in the trial.

The FHFA says of the loans underlying the $2 billion in securities Fannie and Freddie bought [without seeing the individual loans] from Nomura, 68.6 percent had underwriting defects. Nearly a third had false loan-to-value ratios, while 13.1 percent were underwater from the start, the FHFA says.

Nomura, the deals’ sponsor, and RBS, which underwrote three of the seven, deny wrongdoing, and argue any losses were due to an unforeseeable decline in the housing market.

Data has been a prime focus of the trial…

Second, there is the FHFA’s attempt to create the Common Securitization Platform so that standardization of data if not transparency can be brought to mortgage-backed securities.  This effort is being actively derailed by Fannie and Freddie as its completion would potentially allow the US government to wind down Fannie and Freddie and replace them with private investors.

As reported by Asset-Backed Alerts,

The FHFA began work on Common Securitization Platform in 2012 with the vision of centralizing all issuing, payment and reporting functions across the markets for agency and non-agency mortgage bonds. The program, to be owned by Fannie and Freddie, was billed as offering incentives for more private-sector mortgage financing while aiding the agencies in shedding risk and updating their back-office functions.

It also was seen as a way to maintain liquidity in the mortgage-bond market amid various proposals to dissolve Fannie and Freddie.

Those efforts, including one that would replace the agencies with an entity dubbed Federal Mortgage Insurance Corp., have largely stalled. Fannie and Freddie, meanwhile, have seen their already-dominant shares of the mortgage market grow under FHFA director Mel Watt. That has emboldened them in resisting the common program, which they view as opening the door to more private-label lenders.

“It’s hard to see how it’s in the interest of Fannie and Freddie to promote that kind of structure when Congress still has to decide their future,” another source said.