Bloomberg News

Bank of America Sued by U.S. Over Mortgage Loan Sales

October 24, 2012

Bank of America Corp. (BAC:US), the second- biggest U.S. lender by assets, sold defective residential mortgage loans to Fannie Mae and Freddie Mac (FMCC:US) that later defaulted, the U.S. government said in a $1 billion fraud lawsuit against the bank.

The U.S. Justice Department filed the complaint today in Manhattan federal court, claiming the bank and its Countrywide Financial unit generated thousands of defective mortgage loans and sold them to Fannie Mae and Freddie Mac.

The lawsuit is the first by the Justice Department to allege fraud over mortgage loans sold to the two entities, Manhattan U.S. Attorney Preet Bharara said in a statement announcing the suit, which covers conduct from 2007 to 2009. Bank of America acquired Countrywide in 2008.

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen,” Bharara said. “Through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, didn’t immediately return calls and an e-mail seeking comment on the complaint.

The lawsuit is the sixth brought against a major U.S. bank by the Justice Department in less than 18 months over what Bharara called “reckless mortgage practices in the lead-up to the financial crisis.”

Subprime Losses

Fannie Mae (FNMA:US) and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

The government said in the complaint that Bank of America “systematically removed every check” in the issuance of mortgages and then sold the “flawed” mortgages to Fannie Mae and Freddie Mac. Both relied on Bank of America’s assurances that the mortgages they purchased complied with their standards, the U.S. said.

According to the complaint, Countrywide initiated “the Hustle” in 2007 just as mortgage loan defaults were increasing nationally and Fannie Mae and Freddie Mac were tightening their loan purchasing standards to reduce risk. The Countrywide program did just the opposite, the U.S. said.

“The goals of the Hustle were high speed and high volume, where loans ‘move forward, never backward’ in the origination process,” Bharara said in his statement. “To accomplish these goals, the Hustle removed necessary quality control ‘toll gates’ that could slow down the origination process.”

Potential Losses

The suit increases the potential losses Bank of America faces from its acquisition of Countrywide, whose lax lending standards helped fuel the housing bubble. The bank has booked more than $40 billion in costs tied to the takeover.

Bank of America Chief Executive Officer Brian T. Moynihan, 53, is already engaged in disputes with Fannie Mae over who must pay for billions of dollars in failed loans made before and during the financial crisis. The bank had $12.3 billion in unresolved demands for loan refunds from the so-called government-sponsored enterprises as of Sept. 30, a 12 percent increase from the previous quarter.

Fannie Mae, based in Washington, and McLean, Virginia-based Freddie Mac are both under pressure to minimize the scale of their U.S. taxpayer bailouts. The firms, which buy mortgages from lenders and package them into securities for sale to investors, have collectively drawn more than $180 billion in taxpayer funds.

‘Reprehensible’ Conduct

Steven Linick, the inspector general of the Federal Housing Finance Agency, said in the statement announcing the suit that Bank of America’s conduct was “reprehensible.”

Earlier this month, New York Attorney General Eric Schneiderman sued JPMorgan Chase & Co., the biggest U.S. lender, over defective mortgage loans, a suit he said would act as a template for other such cases. The bank has denied wrongdoing.

Last year, Bank of America, JPMorgan and Citigroup were among 17 lenders sued by the FHFA for allegedly misleading Fannie Mae and Freddie Mac over billions of dollars of residential mortgage-backed securities.

Today’s suit was brought under the federal False Claims Act, which allows for triple damages. In announcing the case, Bharara said Fannie Mae and Freddie Mac losses totaled more than $1 billion.

The case is U.S. v. Bank of America Corp. (BAC:US), U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $16.29 USD
    • 0.20
    • 1.23%
  • FMCC
    (Federal Home Loan Mortgage Corp)
    • $3.97 USD
    • 0.24
    • 6.05%
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