Bank of America defrauded investors who bought securities backed by prime mortgages that eventually soured, concealing information that showed the loans were risky, according to a lawsuit filed Tuesday by the U.S. Department of Justice in Charlotte.
The Charlotte-based bank ignored its own underwriting standards when it originated the so-called “jumbo” loans, mortgages typically used for higher-end homes, federal officials contend. The bank led investors to believe that the loans were safer investments then subprime mortgages, even though the bank’s internal performance reports revealed concerns about the quality of the loans, federal officials said.
In essence, federal officials said, mortgage-backed securities that the bank billed as prime were actually just as risky as investments in subprime loans.
According to the Justice Department, investors in the securities have lost $70 million so far. Another $50 million in losses is expected, they said, citing an estimate from Fitch Ratings.
The bank originated the loans in 2007 and sold them as securities in 2008, federal officials said.
The nation’s second-largest lender by assets also misled investors by telling them that bank officials were receiving documentation that verified borrowers’ income, when in many cases they were not, according to federal officials. The bank also hid from the investors information about the risks of jumbo loans being originated by outside mortgage brokers, federal officials said.
The lawsuit is also noteworthy in that it focuses on prime mortgages, rather than the subprime loans that have been the subject of other litigation in the wake of the financial crisis.
Also, the case centers on mortgages originated by Bank of America, unlike other litigation in which investors have claimed losses stemming from securities backed by Countrywide Financial Corp. home loans. Bank of America bought Countrywide in 2008. In a separate case, pending in New York, the bank and 22 institutional investments are seeking approval of an $8.5 billion settlement to resolve claims stemming from Countrywide loans.
Tuesday’s Justice Department announcement was not unexpected. Last week, Bank of America disclosed in a securities filing that the Justice Department was probing one or two jumbo-mortgage securitizations. The bank also said in the filing that the Securities and Exchange Commission alerted the bank that it would recommend civil charges stemming from one of the securitizations.
Only Bank of America is named as a defendant in the Justice Department’s civil lawsuit, not individuals who worked for the bank.
In the securities filing, Bank of America said it has been “in active discussions with senior staff of each government entity in connection with the respective investigations and to explain why the threatened civil charges are not appropriate.”
The case marks the first federal lawsuit brought by the federal government’s Residential Mortgage Backed Securities Working Group. President Barack Obama created the state-federal task force last year to investigate illegal activity – stemming from residential mortgage-backed securities – that contributed to the financial crisis.