Yesterday’s case, originally brought by a whistleblower, is the US department of justice’s first civil fraud lawsuit over mortgage loans sold to the big mortgage financiers, which were bailed out in 2008.
It also compounds the legal problems that Bank of America CEO Brian Moynihan faces over the second-largest US bank’s disastrous 2008 purchase of Countrywide Financial Corp, once the nation’s largest mortgage lender.
According to a complaint filed in Manhattan federal court, Countrywide in 2007 invented a scheme known as the “hustle” to speed up processing of residential home loans. Mortgage executives tried to eliminate “toll gates” designed to ensure that loans were sound and not tainted by fraud, the government said.
This led to “defect rates” that approached 40%, roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to “rebut” the problems being found, it added.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” US attorney Preet Bharara in Manhattan said. “Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
Bank of America did not immediately respond to requests for comment.
The lawsuit seeks civil fines, as well as triple damages under the federal False Claims Act, which the government has used several times in recent years against Wall St.
In February, Bank of America agreed to a $1bn settlement of False Claims Act allegations over home loans submitted for insurance by the Federal Housing Administration.
Since Moynihan’s predecessor Kenneth Lewis paid $2.5bn for Countrywide, the North Carolina-based bank has lost nearly $40bn on mortgage litigation and investor demands to buy back soured loans, Credit Suisse said on Oct 5.
Federal regulators seized Fannie Mae and Freddie Mac on Sept 7, 2008 and put them into a conservatorship.
The financiers are now overseen by the Federal Housing Finance Agency, and have repaid only about 25% of the more than $188bn of taxpayer funds they have drawn down. Fannie Mae alone has drawn down more than $116bn.