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Feds Target Bank of America in $1B Home Loan Mess

Civil suit contends mortgage loans sold to Fannie Mae, Freddie Mac were defective and rushed throughout without proper scrutiny.

The federal government today launched a lawsuit targeting Bank of America, claiming the huge bank generated thousands of defective home mortgage loans that were sold to Fannie Mae and Freddie Mac, leading to more than $1 billion in losses and "countless" foreclosures.

The lawsuit charges that Bank of America continued a new loan program called "Hustle" that was designed to process loans at high speed without quality checks. The government contends this practice was started by Countrywide mortgage, which was acquired by Bank of America in 2008.

“For the sixth time in less than 18 months, this office has been compelled to sue a major U.S. bank for reckless mortgage practices in the lead-up to the financial crisis," said Preet Bharara, U.S. Attorney for the Southern District of New York. "The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope. As alleged, through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill."

Bharara said 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.

"These toxic products were then sold to the government sponsored enterprises as good loans," Bharaa said. "This lawsuit should send another clear message that reckless lending practices will not be tolerated.” 

Countrywide, on its own and as part of Bank of America, was the largest provider of home mortgage loans to the government-sponsored Fannie Mae and Freddie Mac. The government charges that in 2007, as loan default rates were increasing across the nation, Countrywide removed checks that were designed to ensure mortgages were being properly issues. 

To do this, the government contends Countrywide used unqualified and inexperienced clerks and did away with compliance specialists who were supposed to ensure loans had met all the necessary conditions for closing. The lawsuit charges that Countrywide and then later Bank of America knowlingly originated loans with escalating levels of fraud and other series defects that were sold to Fannie Mae and Freddie Mac.

In September 2008, as a result of massive losses from, among other things, the payment of guarantees to investors on loans that defaulted, Fannie Mae and Freddie Mac were placed in conservatorship under the Housing and Economic Recovery Act of 2008. Simultaneously with the creation of the conservatorships, the United States Treasury exercised its authority to purchase Fannie Mae and Freddie Mac stock. As of Dec. 31, 2011, the Treasury had provided $183 billion in funding to Fannie Mae and Freddie Mac through stock purchases.

Bank of America received $15 billion in federal funds through the U.S. Department of the Treasury’s Troubled Asset Relief Program (TARP) on Oct. 28, 2008; an additional $10 billion on Jan. 9, 2009; and $20 billion on Jan. 16, 2009. Bank of America repaid taxpayers’ combined $45 billion TARP investment in full on Dec. 9, 2009. 

The lawsuit seeks civil penalties and damages for more than $1 billion in losses suffered by Fannie Mae and Freddie Mac for defaulted loans fraudulently sold by Countrywide and Bank of America.

Chris Marengo October 25, 2012 at 12:39 PM
It's government intimidation at their best. The 1977 Community Reinvestment Act forced the banks to make risky loan, due to alleged "redlining" in poor neighborhoods. clinton doubled down on this 1977 law, using our now governor Andrew Cuomo, as HUD secretary, to extort cash from banks for refusing to make bad loans...under the guise that the banks were racist (i.e, not making loans to minorities due to bad credit, but the govenrment chalked it up to racism). So the government and the big banks have been involved in this unholy partnership, and now the government can claim how the banks have been bad actors while telling the American public that they are fighting for the "little people". It's like the Mafia, except without the cool murders.
Pat Godfrey October 25, 2012 at 01:32 PM
Government has it's scapegoat for the bad public policy it creates. Fannie Mae and Freddie Mac executives should be the one that are under indictment. They are the ones that pushed these bad loans and huge bonuses were given them because of the amount of loans that were made. 9 billion dollars of hidden loses were accused by auditors to have been covered up. What did the esecutives of Freddie and Fannie get? Bonuses. Jamie Gorelic for example got 26 million in bonuses during her time there.
Andromachos October 25, 2012 at 02:31 PM
After all is said and done, it appears that the failure was the result of many factors, both in the private sector and in government. All of them should be reined in. Both the major banks and the federal government are too large.
SPK October 25, 2012 at 04:06 PM
Bruiser, respect your view. Consider that greed has been around as long as Cain knocked off Abel. Canada, with same greed for profits as the US, had none of these problems. Why; difference in Government policy. Canada never let a social agenda interfere with sound lending. In my view, reader Joshua got it right. Regrettably, we learned the wrong lessons from 2008. All Wall Street did was make efficient that which should never have occurred in first place: Lending to people who shud not have gotten home loans. Recall that for the longest time, Wall Street risked partner money and not taxpayer money, and Dodd-Frank was unnecessary. We are always more cautious with our own money.
NorthCountyHound October 25, 2012 at 05:05 PM
People try to lend me money all the time. I have a sound business, assets, a near perfect credit rating etc and I say no. I pay as I go, usually cash. If I can't afford something, I don't buy it. There were many culprits in the system that led to the 2008 collapse. Congress, Fannie/Freddie, the banks and mortgage lenders, wall street, the rating agencies and the SEC but also the deadbeats who took money with no means or intention of repaying it. I bought my house in 1991 for 170k for cash that I saved while working for 15 years. in 07 it was aprraised for 525k. Now it might be worth 400k but I own it outright. My wife bugged me for years to take a second note, or a HELOC and buy a mansion cause so many of her friends had them. Wisely, I said no. I see no reason why anyone needs to live beyond their means on borrowed money. Credit for business growth and inventory and day to day operating capital is a necessary component of a modern economy, but credit offered to deadbeats simply to inflate real estate or move consumer items is ridiculous and results in exactly the situation we have now. People get what they deserve. I have no sympathy for any of these losers. My only complaint is that the the people I mentioned above who rigged the system for this ineveitable fiasco are not doing hard time.

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