The United States is suing Bank of America Corporation (BAC) for more than $1 billion over alleged mortgage fraud involving the sale of defective loans to Freddie Mac and Fannie Mae. The federal government contends that Countrywide, and then later Bank of America, following its acquisition of the former, executed the “Hustle,” a loan origination process intended to swiftly process loans without the use of quality checkpoints. This allegedly resulted in thousands of defective and fraudulent residential mortgage loans, which were sold to Fannie Mae and Freddie Mac, that later defaulted, leading to innumerable foreclosures and over $1 billion in losses.
The US claims that between 2007 and 2009, mortgage company Countrywide Financial Corp. got rid of checks and quality control on loans, including opting not to use underwriters, giving unqualified personnel incentives to cut corners, and hiding defects, and then proceeded to falsely keep claiming that these loans were qualified to be insured by Freddie Mac and Fannie Mae. The result, says U.S. Attorney for the Southern District of New York Preet Bharara, was that taxpayers were left to foot the bill from these “disastrously bad loans.”
The Hustle was initiated by Countrywide in 2007 via its Full Spectrum Lending Division during a rise in loan default rates and while, in an effort to reduce risk, Freddie Mac and Fannie Mae were getting tougher about requirements for loan purchases. In addition to eliminating key quality control and check procedures, Hustle allegedly depended on inexperienced and unqualified loan processers to handle underwriting duties, while giving them financial incentives to place quantity over quality.
The government contends that although senior management at Full Spectrum Lending were regularly warned that getting rid of toll gates that are supposed to prevent fraud and maintain quality control could lead to disastrous consequences, they allegedly proceeded to continue disregarding such cautions. This meant that Countrywide and Bank of America like knew that the loans they were originating and then selling to the GSEs were defective and/or fraudulent. (The loans that eventually defaulted were a key reason why in September 2008 Freddie Mac and Fannie Mae had to be put into conservatorship under the Federal Housing Finance Agency, pursuant to the Housing and Economic Recovery Act of 2008.)
The US government is filing its mortgage fraud lawsuit under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Federal False Claims Act, which prosecutors have been using to take banks to task over alleged mortgage-related wrongdoings. The act can result in triple damages if the government is able to prove that taxpayers were bilked. The securities case was also brought under the Financial Institutions Reform, Recovery and Enforcement Act. This is the first civil fraud case that the US Department of Justice has brought regarding the sale of mortgage loans to Freddie Mac or Fannie Mae.
U.S. Sues BofA Over Mortgage Sales, The Wall Street Journal, October 25, 2012
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