US sues Bank of America for $1 billion

US sues Bank of America for $1 billion

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by Associated Press and WCNC.com Staff

WCNC.com

Posted on October 24, 2012 at 12:24 PM

Updated Wednesday, Oct 24 at 6:37 PM

NEW YORK (AP) -- The top federal prosecutor in Manhattan sued Bank of America for more than $1 billion on Wednesday for mortgage fraud against Fannie Mae and Freddie Mac during the years around the financial crisis.

U.S. Attorney Preet Bharara said Countrywide Financial, which was later bought by Bank of America, churned out mortgage loans from 2007 to 2009 without making sure that borrowers could afford them.

"The fraudulent conduct alleged in today's complaint was spectacularly brazen," Bharara said in a statement. He said the suit was partly to recover money that Fannie and Freddie lost from defaulted loans.

UNCC Professor of Finance Tony Plath said considering Bank of America has already spent $40 billion to help control the Countrywide mortage fallout, the suit isn't as much a financial issue as it is an issue of showing the public that the bank is still struggling from the mortage crisis.

Also Plath says people who bank with Bank of America won't feel any impact from the suit.

"It's more a frustration to shareholders because their profits are going to be clipped by another billion dollars.  Its a frustration for management because it goes back against what they said yesterday in terms of having mortgages under control," said Plath.

Bank of America had no immediate comment.

Countrywide sold the loans to Fannie Mae and Freddie Mac, which were left to pay for the loans when they defaulted, according to the lawsuit. Fannie and Freddie were effectively nationalized in 2008.

According to the lawsuit, Countrywide used a process called "the Hustle," shorthand for "High-Speed Swim Lane." The idea was that mortgage loans, as they were being processed, would "move forward, never backward."

The lawsuit alleged that Countrywide traded quantity for quality and eliminated underwriters, even from mortgage loans for which borrowers did not have to get their income verified.

Instead, loan processors simply entered data into an automated underwriting system, and if the system gave the go-ahead, "no underwriter would ever see the loan," the lawsuit alleged.

With few checks and balances, there was "widespread falsification" of the data entered into the program, Bharara charged.

Loan processors were given little guidance, the suit said: Checklists for making sure that loans were compliant - for example, assessing whether the income level that a borrower listed was reasonable - were eliminated. Bonuses were based solely on how many loans an employee could process, not the quality.

The lawsuit said that Countrywide executives were aware of the dangerous path they were treading. For example, a quality review in January 2008 showed that 57 percent of Hustle loans went into default.

Instead of notifying Fannie and Freddie, Countrywide instead set about to conceal the quality of the loans it was selling them, the suit said. It said Countrywide even offered a bonus to quality-control workers who could "rebut" the default rates that the review had found.

The lawsuit didn't give specifics, but it accused Countrywide, and later Bank of America, of selling "thousands" of Hustle loans to Fannie and Freddie. Bank of America bought Countrywide in July 2008.

Fannie and Freddie buy mortgage loans from banks, package them into securities and sell them to investors. The idea is to free up banks to make more loans. If a loan defaults, Fannie and Freddie guarantee payments to the investors.

According to the lawsuit, Fannie and Freddie don't review the loans before they purchase them. Instead, they rely on banks' statements that the loans meet certain qualifications.

Bharara said the lawsuit was the first civil fraud suit brought by the Justice Department concerning loans that were later sold to Fannie and Freddie.

Click here to read the 46-page lawsuit (PDF).

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