Bank of America Corp.’s Countrywide unit was found liable for defrauding Fannie Mae and Freddie Mac by selling them thousands of defective loans.
A federal jury in New York today also found former Countrywide executive Rebecca Mairone liable for defrauding the U.S. Mairone was the only individual named as a defendant in the government’s lawsuit.
U.S. District Judge Jed Rakoff, who presided over the trial, told lawyers he will determine the amount of any civil penalty later. The U.S. is seeking a penalty of more than $848 million, the gross loss to Fannie Mae and Freddie Mac as calculated by its expert. Alternatively, the government argues the penalty should be more than $131 million, the estimated net loss.
After the jury left, Rakoff listened to arguments on whether he should consider the net loss or gross loss when deciding the penalty. He also ordered both sides to submit written arguments on whether there is a cap on the penalties he can impose. The judge set a hearing for Dec. 5 to discuss the cap and losses issue and said he would be ready to rule on those matters by Dec. 31.
During the four-week trial, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara alleged that a division of Countrywide in August 2007 initiated a loan program called “High Speed Swim Lane,” or HSSL, that ran until 2008. Countrywide was acquired by Bank of America that year.
“The jury’s decision concerned a single Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Lawrence Grayson, a spokesman for the Charlotte, North Carolina-based bank, said in an e-mailed statement. “We will evaluate our options for appeal.”
Countrywide earned at least $165 million using HSSL, allowing the company to maintain revenue in a “cratering” market for subprime mortgages, the U.S. argued. Government-sponsored entities, or GSEs, such as Fannie Mae and Freddie Mac bought single-family mortgages from lenders.
The U.S. last year joined a whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell. The case is the first brought by the U.S. against a bank over defective mortgages to go to trial.
Mairone told jurors she wasn’t part of a scheme to defraud Fannie Mae and Freddie Mac. She said Countrywide considered risks before instituting HSSL and came up with plans to deal with them.
Under the program, prosecutors said, the time in 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 the lender completed and sold to GSEs.
In closing arguments on Oct. 22, Assistant U.S. Attorney Jaimie Nawaday said the case was “about greed and lies.” She cited e-mails in which Countrywide employees described some HSSL loans as “loser loans.” While some employees said the loans’ quality was “in the ditch,” they still sold them to Fannie Mae and Freddie Mac “for a quick profit,” she said.
Brendan Sullivan, a lawyer for Countrywide, told jurors in his closing arguments that the U.S. failed to prove any fraud occurred and evidence provided by the lender showed that only about 11,000 loans were processed under the HSSL program.
“The government is wrong,” Sullivan told jurors. “There is no fraud, no misrepresentations and no violations of law.”
Messages sent by O’Donnell during HSSL’s tenure show him lauding colleagues’ efforts on the program, endorsing it and supporting implementation of new measures, Sullivan said.
O’Donnell testified during the trial, which began Sept. 24 with jury selection, that he warned Countrywide executives including Mairone about the failure rate of HSSL loans. Under the program, Countrywide shifted the job of approving loans from trained underwriters to “loan specialists,” or clerks who lacked sufficient training, Nawaday said.
“The HSSL program was all about speed and volume and not about quality,” Nawaday said. “Quality was no more than a distraction.”
The case is U.S. v. Countrywide Financial Corp., 12-cv-01422, U.S. District Court, Southern District of New York (Manhattan).