A billion-dollar lawsuit that federal authorities filed Wednesday against Bank of America Corp. (BAC) provides a rare detailed glimpse of the allegedly dirty mortgage doings that have long tarnished the Charlotte, N.C. bank's relationship with Fannie Mae and Freddie Mac.
The civil suit was filed in Manhattan federal court by Preet Bharara, the U.S. Attorney for the Southern District of New York. It accuses Bank of America of fraudulently manipulating and concealing data related to home mortgages that it sold to the government-sponsored entities. Bharara's suit seeks $1 billion in damages.
"Countrywide and Bank of America systematically removed every check in favor of its own balance - they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects," Bharara's office said in a press release. "These toxic products were then sold to the government sponsored enterprises as good loans."
Bank of America did not respond directly to most of the allegations in the lawsuit, but a company spokesman said that the bank has acted responsibly to resolve legacy mortgage matters.
“The claim that we have failed to repurchase loans from Fannie Mae is simply false,” added B of A spokesman Lawrence Grayson. “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.”
The government's allegations span the activities of Countrywide Home Loans in the period immediately after the subprime loan machine stalled in 2007, a time when the company was desperate to continue selling mortgages to Fannie and Freddie, the complaint claims. The allegations of wrongdoing stretch into the following year, when Countrywide was acquired by Bank of America, and into 2009 when it operated as a unit of the bank.
"It's as if Bank of America and Countrywide, having run out of private investors to defraud, then turned that same fraudulent energy into ripping off the government and Fannie and Freddie," commented Neil Barofsky, a former Southern District prosecutor who served as Special Inspector General for the Troubled Asset Relief Program and is an outspoken critic of big banks.
Countrywide gave low-ranking employees authority to approve so-called conforming loans and provided them financial incentives to green-light mortgages that did not meet specifications set by Fannie and Freddie, according to the complaint.
This fraud-enabling system was kept in place after Bank of America took control of Countrywide, the complaint states. It extended into 2009, including a period that followed the government's bailout of B of A and agreement to put Fannie and Freddie into conservatorship, it adds.
The conduct alleged in court papers provides missing context for the ongoing dispute between Bank of America and the government-sponsored housing giants over mortgage put-backs.
Those disputes were a factor in a decision earlier this year by Bank of America and Fannie Mae to end many ties between them. Bank of America continues to sell residential mortgages to Freddie Mac.
Last year, the Federal Housing Finance Agency, which has overseen the two mortgage behemoths since they received government bailouts, alleged that Bank of America and its predecessor companies sold more than $57 billion in private-label securities to Fannie and Freddie that had riskier characteristics than were disclosed in marketing materials.
Those government suits had a check-the-box quality, however. They were brought against 17 financial institutions, including Bank of America, shortly before the statute of limitations expired. And they contained nowhere near the level of detail about alleged misconduct as the suit filed Wednesday does.
The key figure in the new lawsuit is a former Countrywide executive-turned whistleblower named Edward O'Donnell. According to the complaint, he worked for Countrywide from 2003 to 2009, first as a senior vice president and later as an executive vice president.
O'Donnell filed a sealed whistleblower suit against B of A, which was then joined by federal authorities.
Countrywide's system of originating conforming loans that it would sell to Fannie and Freddie was called the "Hustle" - or "HSSL," which stood for "High Speed Swim Lane," according to the complaint.
The program, launched in 2007, operated under the motto "Loans Move Forward, Never Backward," the government suit alleges. The program eliminated what Countywide executives termed "toll gates" in the loan origination process. One innovation was to get rid of a pay provision that tied bonuses to the detection of loan defects.
"As a result, loan specialists and funders earned bonus compensation based purely on loan volume and had no incentive to safeguard loan quality," the complaint alleges.
The suit goes on to allege that "Hustle" loans violated the representations the company made to Fannie and Freddie at the time of their sale.
Although the suit seeks $1 billion in damages, it was brought under the False Claims Act, which allows for a tripling of that amount, meaning bank's ultimate liability could hit $3 billion.
That number is still a fraction of Bank of America's potential mortgage-related liabilities, which appears to have weighted on the weak performance of B of A's stock today.
Patrick Burns, spokesman for the Taxpayers Against Fraud Education Fund, a group whose members include plaintiffs lawyers representing whistleblowers, said that the federal government does not join whistleblower suits unless the case is solid.
"Preet Bharara is fairly famous for bringing the goods. He's aggressive. He's smart," Burns said. "And the evidence here appears to be red-hot and smoking. I think they're [Bank of America's representatives] in trouble."