Bank of America Corp. (BAC:US) was sued by the U.S. for allegedly hiding risks from investors in a 2008 deal for $850 million of bonds backed by residential mortgages.
Government lawsuits filed today in federal court in Charlotte, North Carolina, lay out a pattern of intentional acts by bank officials to disguise the mortgages’ risks in disclosures to the U.S. Securities and Exchange Commission and investors. Those accused of fraudulent conduct are identified only by their positions without any names.
“Today’s filing marks the latest step forward in the Justice Department’s ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct,” Attorney General Eric Holder said in a statement.
The new set of lawsuits could hinder Chief Executive Officer Brian T. Moynihan’s effort to end fallout from the 2008 credit crisis and purchases of Countrywide Financial Corp. and Merrill Lynch & Co. The Charlotte-based bank has already spent more than $45 billion on litigation, settlements and refunds to investors tied to shoddy mortgages, servicing and foreclosures.
The Justice Department estimated in its suit alleging violations of the Financial Institutions Reform, Recovery and Enforcement Act that investors in the securitization deal would sustain losses exceeding $100 million. The SEC in its own lawsuit said the firm had committed securities fraud.
“These were prime mortgages sold to sophisticated investors who had ample access to the underlying data,” Bill Halldin, a Bank of America spokesman, said in a statement. “The loans in this pool performed better than loans with similar characteristics originated and securitized at the same time by other financial institutions.”
The bank, the second-biggest U.S. lender, said last week it had received subpoenas and information requests regarding mortgage securities and collateralized debt obligations created during the housing boom.
The company failed to disclose that more than 22 percent of the mortgages in the pool were made to borrowers who were self-employed and that its own standards weren’t followed to verify their income and assets, the department said in its complaint.
More than 40 percent of the 1,191 mortgages in the pool didn’t “substantially comply” with the bank’s underwriting standards, the Justice Department claimed. Employees who worked on the origination of the mortgages admitted that the bank “emphasized quantity over quality” and that they were instructed by supervisors that it wasn’t their job to discover mortgage fraud, according to the Justice Department’s complaint.
Bank of America decided not to conduct any loan-level due diligence on the mortgages used as collateral in the securitization, in part to save about $15,000 in expenses, according to the complaint.
Federal Home Loan Bank of San Francisco bought about $600 million of the pool while Wachovia Bank purchased about $235 million, according to the complaint.
Amy Stewart, a spokeswoman for the Federal Home Loan Bank of San Francisco, and Mary Eshet, a spokeswoman for Wells Fargo, which bought Wachovia in 2008, declined to comment on the suit.
As of June, at least 23 percent of the mortgages in the pool had defaulted or are delinquent, which the government calls an abnormally high percentage that cannot be explained solely by the slump in the real estate market. The defaults have led to about $70 million in losses so far with another $50 million estimated by Fitch Ratings, according to the government.
“These mortgages share many of the same characteristics of the now infamous ‘Liar Loans,’ although defendants misleadingly referred to them as ‘Paper Saver’ mortgages,” the department said in its complaint.
The Justice Department case is U.S. v. Bank of America Corp. (BAC:US), 13-cv-00446; the SEC case is Securities and Exchange Commission v. Bank of America NA, 13-cv-00447, U.S. District Court, Western District of North Carolina (Charlotte).
To contact the reporters on this story: Phil Mattingly in Washington at firstname.lastname@example.org; Tom Schoenberg in Washington at email@example.com.
To contact the editors responsible for this story: Steven Komarow at firstname.lastname@example.org; Michael Hytha at email@example.com.