Bank of America Corp., the second-biggest U.S. lender by assets, was accused by the federal government in a $1 billion fraud lawsuit of selling defective residential mortgage loans to Fannie Mae and Freddie Mac that later defaulted.
The U.S. Justice Department filed the complaint yesterday in Manhattan federal court, claiming the bank and its Countrywide Financial unit generated thousands of defective loans and sold them to the two home-mortgage finance companies now under government control.
“The fraudulent conduct alleged in yesterday’s complaint was spectacularly brazen,” U.S. Attorney Preet Bharara in Manhattan said in a statement announcing the suit. “Through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
The lawsuit, which covers conduct from 2007 to 2009, is the first by the Justice Department to allege fraud over mortgage loans sold to the two entities, Bharara said. Bank of America, which acquired Countrywide in 2008, was among 17 financial institutions sued in September 2011 by Fannie Mae and Freddie Mac’s regulator, the Federal Housing Finance Agency, over losses on mortgage securities sold to the companies.
The Bank of America 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.”
U.S. District Judge Jed Rakoff, who is overseeing the case, today set a schedule that could result in a trial as early as August 2013. In a pretrial conference in Manhattan, Assistant U.S. Attorney Pierre Armand told Rakoff the government may amend its complaint to add current and former Bank of America employees to the case. Rakoff set Dec. 31 as the deadline for doing so.
This month, the government sued Wells Fargo & Co., the biggest mortgage lender and servicer, over claims the San Francisco-based bank made reckless loans that caused losses for a federal insurance program when they defaulted. The complaint alleges misconduct over more than a decade related to the bank’s participation in a Federal Housing Administration program and follows similar cases against other lenders including Citigroup Inc. and Deutsche Bank AG.
A state and federal task force is investigating misconduct in the bundling of mortgage loans into securities before the housing bust. The group’s first legal action was this month, when New York Attorney General Eric Schneiderman sued JPMorgan Chase & Co., the biggest U.S. lender, over defective mortgage loans underlying securities, a suit he said would act as a template for other such cases. The bank has denied wrongdoing.
“Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters,” Larry DiRita, a spokesman for the Charlotte, North Carolina-based company, said in an e-mailed statement. “The claim that we have failed to repurchase loans from Fannie Mae is simply false. At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.”
Fannie Mae and Freddie Mac losses totaled more than $1 billion, Bharara said. The Justice Department’s complaint was brought under the federal False Claims Act, which allows for triple damages.
Fannie Mae 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.”
Also yesterday, a federal judge in Manhattan unsealed a so-called whistle-blower lawsuit filed on Feb. 24 against Bank of America over the same program. Edward O’Donnell, who worked at Countrywide as an executive vice president, said in his complaint that he “personally objected to the ‘Hustle’ on numerous occasions” because it was leading to an increasing number of early mortgage defaults.
O’Donnell’s concerns “were dismissed and his role continued to be marginalized,” he said in his complaint.
David Wasinger, a lawyer for O’Donnell, didn’t respond to phone and e-mail messages yesterday seeking comment on the complaint.
O’Donnell lives in Texas and worked at Countrywide from 2003 to 2009, according to his complaint. The statute allows citizens to file complaints on behalf of the government and share in the recovery.
The U.S. lawsuit 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.
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.”
The case is U.S. v. Bank of America Corp., U.S. District Court, Southern District of New York (Manhattan). O’Donnell’s suit is U.S. ex rel. Edward O’Donnell v. Bank of America, 12-cv-1433, U.S. District Court, Southern District of New York (Manhattan).