The U.S. Attorney for Manhattan’s Southern District is asking the Second Circuit Court of Appeals to look at a ruling that overturned the jury verdict that held Countrywide Home Loans liable for mortgage fraud. Countrywide, which is now owned by Bank of America (BAC), made billions of dollars on home loans that went into default following the 2008 financial crisis.
It was in 2007 that the mortgage provider introduced a new program, referred to as the “high-speed swim lane,” to process applications for mortgages. Within Countrywide, the program was dubbed the “hustle.”
The program did not include the majority of conditions required to make sure loans would be paid back after Wall Street banks, Freddie Mac, or Fannie Mae sold them to investors. Unfortunately, Freddie and Fannie were not told that these conditions had become more relaxed or that loans no longer met certain criteria. The two mortgage finance firms had tightened their own loan buying requirements and underwriting guidelines. As a result of the loosened restrictions by Countrywide, contended the Justice Department, “rampant instances of fraud” resulted.
Despite the 2013 jury verdict that found Countrywide and a Bank of America executive liable for mortgage fraud, a Second Circuit judge panel overruled the decision. It found that even though Countrywide purposely breached contracts, this was not fraud because the lender had not intended to fool customers at the time that contracts were signed.
Now, U.S. Attorney Preet Bharara wants a Second Circuit panel of judges to consider that Countrywide made false statements when selling loan bundles to customers, including Freddie Mac and Fannie Mae. He said that the court bypassed evidence at trial that showed how the defendants made fraudulent misrepresentations when selling the loans and while the contracts were being executed. Prosecutors are arguing that the language in the contract refers to each mortgage sale during the actual sale and not upon the writing of the contract.
In other recent mortgage fraud news, Bloomberg reports that U.S. securities regulators are getting ready to bring a civil case against a former Goldman Sachs Group Inc. (GS) mortgage bond trader. Edwin Chin was fired from the firm in 2012.
The Department of Justice and the Securities and Exchange Commission have reportedly been working together to investigate Chin’s activities while he worked at Goldman Sachs. They believe that he may have inflated mortgage bond prices after the bonds were acquired by the bank so he could trade them at a bigger profit. Sources told Bloomberg that this would have occurred after the economic crisis eight years ago.
According to a 2011 U.S. Senate Report, a group of traders with whom Chin worked with attempted to manipulate derivatives prices in 2007. These derivatives were connected to subprime loans. Financial Industry Regulatory Authority disclosures show that Chin was let go in the wake of allegations that after he sold securities with the consent of his manager he bought some of them back without notifying his supervisor.
The U.S. government continues to probe into possible trading-related wrongdoings involving securitized debt, including mortgage-backed securities.
U.S. Attorney Asks Court to Reconsider Countrywide Loan Case, Pro Publica, August 5, 2016
U.S. Said to Prepare Case Against Former Goldman MBS Trader, Bloomberg, August 9, 2016