(Updates with bank’s statement in the ninth paragraph.)
Oct. 5 (Bloomberg) -- Bank of America Corp. should face fraud proceedings after its Countrywide unit submitted faulty data to back up claims for reimbursement on federally insured mortgages, according to an audit by a U.S. watchdog.
Half of 14 loans reviewed had “material underwriting deficiencies” concerning borrowers that resulted in more than $720,000 in losses, according to a Sept. 30 report from the Department of Housing and Urban Development’s inspector general. Kelly Anderson, a HUD regional inspector general, recommended the agency pursue legal remedies against Charlotte, North Carolina-based Bank of America, the biggest U.S. lender.
“Countrywide did not properly verify, analyze, or support borrowers’ employment and income, source of funds to close, liabilities and credit information,” Kelly wrote in the audit. “This noncompliance occurred because Countrywide’s underwriters did not exercise due diligence in underwriting the loans.”
The Federal Housing Administration, run by HUD, insures mortgages on loans to borrowers who can’t find traditional financing, such as those with low incomes. Lenders can ask the FHA to cover losses if borrowers default. The agency has stepped up scrutiny of those claims, and denials could be the next wave of expenses tied to faulty mortgages for lenders including Bank of America, FBR Capital Markets Corp. said on Oct. 3.
The U.S. said in May it may pursue other firms after suing Deutsche Bank AG for more than $1 billion, accusing the firm of lying to the FHA while arranging mortgage insurance.
“This is exactly what we’re concerned about,” said Paul Miller, FBR’s banking analyst, said in an interview yesterday. “These loans were put together really sloppy. There were problems with the loans and the servicing. They can go after these banks as much as they want. The issue is, how deep do they want to go?”
Bank of America, which bought Countrywide Financial Corp. in 2008, may be among the biggest losers if its claims are rejected, according to Miller.
The lender should perform a review of all mortgages that defaulted within the first six months of their creation, implement a quality-control program, and repay the government for the $720,000 in losses, according to the HUD report.
Bank of America “adheres to HUD regulations and has taken the audit findings seriously,” Rick Simon, a company spokesman, said in an e-mailed statement. “This audit took place over a year ago and pertains to loans originated under Countrywide operations, policies and procedures. Bank of America believes the loans generally complied with FHA underwriting requirements, were made to qualified FHA borrowers, and that Countrywide adhered to a written quality control plan.”
The average rate of “seriously delinquent” loans-to- claims in the area audited -- Illinois, Michigan, Minnesota, Ohio, Wisconsin and Indiana -- was 6.76 percent for Countrywide compared with a regional average of 3.59 percent. Bank of America was the second-biggest FHA lender after Wells Fargo & Co. during the fiscal year ended Sept. 30, 2010, with $22 billion in loans.
HUD’s inspector general identified 4,050 Countrywide loans originated between July 1, 2008, and May 26, 2009, that were at least 60 days overdue within their first six mortgage payments.
Doing the Math
In one instance, Countrywide said a borrower earned $6,192 a month when pay stubs reflected income of $4,377. In other cases, Countrywide failed to properly review bad loans to ensure they met HUD’s guidelines before submitting claims, the department said.
In a 35-page response to HUD dated July 19, Bank of America Senior Vice President Linda Jacopetti acknowledged that “oversights may have occurred in some instances” and said the unit didn’t intentionally disregard FHA guidelines. There were “isolated occurrences in a handful of cases among thousands of FHA loans originated” in that time, she said.
Lemar Wooley at HUD and Michael Zerega of the inspector general office declined to comment on the report.
Bank of America has lost more than half its market value this year amid rising claims tied to defective loans, mortgage- bond securitization and foreclosures. Costs related to those problems have totaled at least $65.7 billion for the five biggest U.S. home lenders, including $39.1 billion for Bank of America since the start of 2007, according to data compiled by Bloomberg.
CitiMortgage, a unit of Citigroup Inc., was faulted in a separate inspector general’s report. A review of 68 loans showed the firm, led by Chief Executive Officer Vikram Pandit, 54, improperly submitted claims of almost $5 million, which should be returned to HUD, according to the audit, which covered 2010.
That case stems from an FHA program that let borrowers in default sell their homes to satisfy mortgage debts to New York- based Citigroup, even if the proceeds were less than the total owed. The FHA compensated the bank for the difference between the sale price and the debt, according to the report.
“Citi did not have adequate policies and procedures in place to ensure that it properly determined borrower eligibility to participate in the program,” according to the report.
Citigroup disagreed with the watchdog’s findings, according to the audit. Sean Kevelighan, a spokesman for the bank, said he couldn’t comment.
Borrowers increasingly rely on FHA-backed loans after the collapse of subprime lenders, according to Miller. The FHA covers about 10 percent of all mortgage debt outstanding, up from 4 percent in 2006, he wrote. The program has $4.7 billion in capital against a $1 trillion portfolio, he wrote.
Bank of America CEO Brian T. Moynihan was asked during a June conference whether he was concerned that the FHA would reject the lender’s demands for reimbursement.
“I’d say it is a risk,” said Moynihan, 51. “All of us, as we think about the mortgage business, continue to think about how you do business with various counterparties if their behavior can change on you during stress times.”
--With assistance from James Sterngold in New York. Editors: Rick Green, Peter Eichenbaum, Dan Reichl
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