U.S. Sues Bank of America for $1 Billion for Mortgage Fraud

Bank of America suedNEW YORK (AP) - The top federal prosecutor in Manhattan sued Bank of America (BAC) for more than $1 billion on Wednesday for mortgage fraud against Fannie Mae and Freddie Mac during the years around the financial crisis.

U.S. Attorney Preet Bharara said Countrywide Financial, which was later bought by Bank of America, churned out mortgage loans from 2007 to 2009 without making sure that borrowers could afford them.

"The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," Bharara said in a statement. He said the suit was partly to recover money that Fannie and Freddie lost from defaulted loans.

Bank of America had no immediate comment.

Countrywide sold the loans to Fannie Mae and Freddie Mac, which were left to pay for the loans when they defaulted, according to the lawsuit. Fannie and Freddie were effectively nationalized in 2008.

According to the lawsuit, Countrywide used a process called "the Hustle," shorthand for "High-Speed Swim Lane." The idea was that mortgage loans, as they were being processed, would "move forward, never backward."

The lawsuit alleged that Countrywide traded quantity for quality and eliminated underwriters, even from mortgage loans for which borrowers did not have to get their income verified.

Instead, loan processors simply entered data into an automated underwriting system, and if the system gave the go-ahead, "no underwriter would ever see the loan," the lawsuit alleged.

With few checks and balances, there was "widespread falsification" of the data entered into the program, Bharara charged.

Loan processors were given little guidance, the suit said: Checklists for making sure that loans were compliant - for example, assessing whether the income level that a borrower listed was reasonable - were eliminated. Bonuses were based solely on how many loans an employee could process, not the quality.

The lawsuit said that Countrywide executives were aware of the dangerous path they were treading. For example, a quality review in January 2008 showed that 57 percent of Hustle loans went into default.

Instead of notifying Fannie and Freddie, Countrywide instead set about to conceal the quality of the loans it was selling them, the suit said. It said Countrywide even offered a bonus to quality-control workers who could "rebut" the default rates that the review had found.

The lawsuit didn't give specifics, but it accused Countrywide, and later Bank of America, of selling "thousands" of Hustle loans to Fannie and Freddie. Bank of America bought Countrywide in July 2008.

Fannie and Freddie buy mortgage loans from banks, package them into securities and sell them to investors. The idea is to free up banks to make more loans. If a loan defaults, Fannie and Freddie guarantee payments to the investors.

According to the lawsuit, Fannie and Freddie don't review the loans before they purchase them. Instead, they rely on banks' statements that the loans meet certain qualifications.

Bharara said the lawsuit was the first civil fraud suit brought by the Justice Department concerning loans that were later sold to Fannie and Freddie.

This is a breaking story. Check back for updates.

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For all those who wish to know what happened in the housing meltdown, read Michael Lewis', "The Big Short". Basically, the insurance on these investment pools was worth more than if the loans went to maturity. All they had to do was make sure that the mortgage pools failed. To do this, Goldman Sachs, et. al. made loans to people they knew couldn't pay back their home loans. The Credit Default Swaps (the insurance costs) paid big odds compared to maturation. They crashed the mortgage industry and the Global Financial Crisis ensued.

October 26 2012 at 2:16 PM Report abuse rate up rate down Reply

Is this actually going to work?

October 25 2012 at 3:15 PM Report abuse rate up rate down Reply

Hang all involved.

October 25 2012 at 11:36 AM Report abuse +1 rate up rate down Reply

I'm no bank supporter, nor do I trust the feds, but didn't congress force many banks to make highly questionable loans to poor people back in the late 90's and 2000s? Now the feds want to crucify these same banks for wrong-doing........sounds like harassment to me. Banks should counter-sue. I would like to see this court case and hear all the BS legislation that congress passed back then which I believe contributed to the housing meltdown and ensuing deep recession.

October 25 2012 at 8:32 AM Report abuse +1 rate up rate down Reply

What happen to the guy that ran country wide, always was a spic and span dresser/???did he get prison or
is he still running loose.....also the real estate industry can be blamed for a lot of the bad loans passing
homes, condos etc to the lending institutions that were just no good.....trying to flip them I guess...I hope
they burn BA...toby

October 25 2012 at 8:23 AM Report abuse +3 rate up rate down Reply

It is about time.

October 25 2012 at 6:36 AM Report abuse +1 rate up rate down Reply

I hope they go under

October 25 2012 at 2:42 AM Report abuse +1 rate up rate down Reply
John N.

When will the Feds sue Chase Bank? It's more than time for that Highway Robbery Chain to get their Karma. They completely destroy people's credit for fun. It's time Jamie Dimon and his minions meet their fate. They have manipulated and outright LIED to utilize no income check mortgages . Enough is Enough, Chase Bank must answer to their illegal practices now.

October 25 2012 at 2:28 AM Report abuse +3 rate up rate down Reply

I hope they crucify Bank of America, I know they screwed me over on my second mortgage. I was never late always paid on time but yet when the bail out was going on Bank of America sold my second mortgage to a debt collector called Green Tree. Later on I found out I was not the only one that their mortgage was sold to this debt collector. I can never find out why, and how they can do this and knowing to give me this answer. Plus, I have no legal recourse to take against Bank of America and when my second mortgage was sold to Green Tree. It took place during the Bush administration. All I know is this has to be illegal. What they done in the federal government should investigate these matters to and also take legal action against Bank of America. Thank you Charlie

October 25 2012 at 1:40 AM Report abuse rate up rate down Reply
1 reply to morykin722's comment

I see you conveniently stuck in the part about the Bush administration. So if it happened during the Obama administration that would be different ?

October 25 2012 at 11:33 AM Report abuse -2 rate up rate down Reply

Give am almost a trillion get it back a billions @ a time ? lol

October 25 2012 at 1:13 AM Report abuse +1 rate up rate down Reply