Bank of America Corp.'s Countrywide unit was found liable for defrauding Fannie Mae (FNMA) and Freddie Mac by selling them thousands of defective loans. The case was the first brought by the U.S. against a bank over defective mortgages to go to trial.
A federal jury in New York today also found former Countrywide Financial Corp. executive Rebecca Mairone liable for defrauding the U.S. Mairone was the only individual named as a defendant in the government's lawsuit.
After jurors were excused, U.S. District Judge Jed Rakoff, who presided over the trial, told lawyers he will determine the amount of any civil penalty at a later date. Assistant U.S. Attorney Pierre Armand today asked the judge to impose a penalty of as much as $848 million, representing the gross losses to Fannie Mae and Freddie Mac. Armand said alternatively, Rakoff could fine Countrywide about $131 million, the estimated net losses to the two entities.
Rakoff set a Dec. 5 hearing for arguments on the issues and said he would be ready to rule on those matters by Dec. 31. He said if he determines an evidentiary hearing is needed, he told lawyers to be prepared to have their expert witnesses ready to proceed during the first week in January.
Manhattan U.S. Attorney Preet Bharara, whose office brought the case, said Countrywide's program "treated quality control and underwriting as a joke."
"In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow," Bharara said in a statement. "That profit, however, was built on fraud, as the jury unanimously found."
During the four-week trial, prosecutors in Bharara's Civil Fraud unit 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 of six women and four men deliberated about five hours today. After the verdict, a female juror said she and her colleagues on the panel agreed with the government's view that Countrywide's Full Spectrum Lending unit had foisted off substandard loans to Fannie Mae and Freddie Mac (FMCC) under the HSSL program.
"I knew something about what was going on in the mortgage debacle but it was certainly interesting to see how this happened first-hand," said the woman, who declined to be identified. She is a freelance writer who lives on Manhattan's Upper West Side.
The juror cited the testimony of John Boland, a former Countrywide employee, who described some loan specialists who handled the HSSL loans being told they wouldn't be allowed to go home for the night unless they approved a loan. Jurors asked to re-hear Boland's videotape deposition just minutes before announcing their verdict.
Boland testified he'd complained to Countrywide superiors repeatedly and said it was "mind blowing" to learn that two employees who criticized the process were then fired.
"Boland's testimony was shocking," the juror said. "Those employees were told to do '30 in 30,' or 30 loans in 30 days. I will say in my opinion the bank and these employees were just passing off unsatisfactory loans as prime loans and Fannie and Freddie got stuck."
Countrywide earned at least $165 million using HSSL, allowing the company to maintain revenue in a "cratering" market for subprime mortgages, prosecutors told the jury in closing arguments yesterday. Government-sponsored entities, or GSEs, such as Fannie Mae and Freddie Mac bought single-family mortgages from lenders.
"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."
Marc Mukasey, a lawyer for Mairone, said he would appeal.
"We are not going to stop fighting for Rebecca," Mukasey said after court. "She's a woman of integrity, ethics and honesty. She never engaged in any fraud because there was no fraud. We're going to fight on."
The U.S. last year joined the whistle-blower action against Bank of America filed by former Countrywide executive Edward O'Donnell.
O'Donnell, who came to court this morning after jurors began their deliberations, declined to comment after the verdict was announced. Under whistle-blower laws, O'Donnell testified he could collect as much as $1.6 million of any monetary damages awarded to the U.S.
Under the HSSL 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."
Mairone took the stand in her own defense and 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.
The case is U.S. v. Countrywide Financial Corp., 12-cv-01422, U.S. District Court, Southern District of New York (Manhattan).