* Fannie Mae, Freddie Mac said to lose money on mortgage debt
* Judge refuses to dismiss securities law claims
* Judge dismisses negligent misrepresentation claims
* Lawsuit one of 17 brought by FHFA
By Jonathan Stempel
May 4 (Reuters) - A U.S. judge has rejected UBS AG's bid to dismiss a federal regulator's lawsuit accusing it of misleading Fannie Mae and Freddie Mac into buying billions of dollars of risky mortgage debt.
U.S. District Judge Denise Cote in Manhattan said on Friday that the Federal Housing Finance Agency may pursue claims that UBS violated federal securities laws by misleading Fannie Mae and Freddie Mac into buying $6.4 billion of subprime and other residential mortgage-backed securities.
The case is one of 17 that the FHFA filed last year against banks over losses suffered by the housing finance giants on approximately $200 billion of mortgage debt. Cote's decision is the first to consider a defendant bank's motion to dismiss, and the judge's reasoning may also be applied in the other cases.
"The court is essentially saying that banks do not get to plead ignorance when they had an obligation to provide information to investors," said Kathleen Engel, a professor at Suffolk University Law School in Boston and co-author of "The Subprime Virus."
"It will give the FHFA a lot of confidence to pursue its cases, and make the banks very skittish."
The FHFA, the conservator for Fannie Mae and Freddie Mac, said the government-sponsored enterprises lost more than $1.1 billion on the securities as more borrowers fell behind or went into foreclosure. It sought to hold UBS responsible for marketing the securities as being safer than they were.
"A Securities Act defendant cannot simply claim that she blindly reported information given to her by third parties and thereby avoid liability for inaccuracies that made their way into the offering materials," Cote wrote in a 66-page decision, referring to a 1933 federal securities law.
She also dismissed claims accusing UBS of negligent misrepresentation.
Bank of America Corp, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co and Royal Bank of Scotland Group Plc are among the defendants in the other FHFA cases.
UBS spokesman Christiaan Brakman said Fannie Mae and Freddie Mac were sophisticated investors with "expert knowledge" of mortgage industry practices and standards. He said UBS is reviewing Cote's decision and is confident of its case.
Stefanie Johnson, an FHFA spokeswoman, said the regulator is pleased with the decision and will continue to press its case, "which is important to the enterprises and taxpayers."
The FHFA lawsuits are among many accusing banks of selling mortgage securities that they knew or should have known were riskier than advertised.
Losses on the securities have been a major contributor to the five-year U.S. housing slump, and were a large factor in the 2008 global financial crisis.
The U.S. government has lost $151 billion on its investments in Fannie Mae and Freddie Mac since it seized the companies on Sept. 7, 2008. FHFA director Edward DeMarco is trying to recoup some of those losses and minimize future losses.
In its case against UBS, the FHFA sought to recover Fannie Mae's and Freddie Mac's losses on debt that the Swiss bank sold in 22 securitizations from September 2005 to August 2007.
It accused UBS of failing to perform adequate due diligence on the underlying loans, and hiding or misstating the quality of the underwriting, the ability of borrowers to make payments and the frequency with which borrowers occupied their homes.
Cote said the FHFA had plausibly alleged that the mortgage originators had "serially deviated" from their underwriting standards, with the result that statements in the securities offering materials that UBS provided were false.
The case is Federal Housing Finance Agency v. UBS Americas Inc et al, U.S. District Court, Southern District of New York, No. 11-05201.