Bank of America Corp.’s Countrywide unit defrauded Fannie Mae and Freddie Mac by selling them thousands of loans known to be defective, an attorney for the U.S. said in closing arguments in a lawsuit against the lender.
The U.S. last year joined a whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell. The U.S. claims Countrywide, which the Charlotte, North Carolina-based bank acquired in 2008, earned at least $165 million using a new loan origination process called the “High Speed Swim Lane” or HSSL.
Under the new system, prosecutors said underwriters who were trained to review the loans were “benched” in favor of “loan specialists,” or clerks who lacked sufficient training. The speed with which more than 28,800 loans were processed was reduced to as little as 10 days from 60 days, and safeguards were lifted to boost the number of loans which the lender completed and sold to government sponsored enterprises, or GSEs, the U.S. said.
“This is a case about greed and lies,” Assistant U.S. Attorney Jaimie Nawaday told the Manhattan federal court jury. While some Countrywide employees were internally referring to HSSL loans as “loser loans” or saying the quality was “in the ditch,” the company was at the same time selling them to Fannie Mae and Freddie Mac “for a quick profit,” she said.
Brendan Sullivan, a lawyer for Countrywide, told jurors yesterday that the U.S. failed to prove Fannie Mae or Freddie Mac had been defrauded and said evidence provided by the lender at trial showed that just about 11,000 loans were processed under the HSSL program.
“The government is wrong,” Sullivan said in his closing arguments. “There is no fraud, no misrepresentations and no violations of law,” he said, adding that the government’s case against the lender was “a theory in search of evidence that each time hits a brick wall.”
Contemporaneous messages sent by O’Donnell during the tenure of HSSL, which ran from 2007 to 2008, show he endorsed the program, lauded colleagues’ efforts on it and supported implementation of new measures, Sullivan said.
The case, which began Sept. 24 with jury selection, is the first brought by the U.S. against a bank over defective mortgages to go to trial.
“The government says we were in a fantastical voyage between two realities, and that is 100 percent true,” Sullivan told jurors during his closing statement. “We’ve been dragged down the rabbit hole of Alice in Wonderland.”
Government-sponsored entities such as Fannie Mae and Freddie Mac bought single-family mortgages from lenders. The U.S. alleges that a division of Countrywide initiated HSSL to maintain revenue in a “cratering” market for subprime mortgages.
“The HSSL program was all about speed and volume and not about quality,” Nawaday said yesterday. “Quality was no more than a distraction.”
O’Donnell testified during the trial that he warned other Countrywide executives about the failure rate of HSSL loans, including former Countrywide executive Rebecca Mairone.
Mairone, who is the only individual named as a defendant in the case, took the stand in her own defense during the trial and said she wasn’t part of a scheme to defraud Fannie Mae and Freddie Mac.
Her lawyer, Michael Hefter, told jurors yesterday that O’Donnell had a grudge against his client because he once sought a job at a Countrywide which he didn’t get. Hefter cited an April 2008 e-mail O’Donnell sent to a colleague complaining about Mairone that said, “We’re going nuclear” against her.
“Mr. O’Donnell came into this courtroom a man with a grudge and with a mission,” Hefter said.
O’Donnell could collect as much as $1.6 million of any monetary damages awarded to the U.S. if the jury finds Bank of America, which acquired Countrywide, liable for fraud, both Hefter and Sullivan told jurors yesterday.
U.S. District Court Judge Jed Rakoff, who is presiding over the trial, said he will give legal instruction to the jury today.
The case is U.S. v. Countrywide Financial Corp., 1:12-cv-01422, U.S. District Court, Southern District of New York (Manhattan).