U.S. Sues Bank of America for $1 Billion Over Mortgage Sales

The Department of Justice announced Wednesday it is suing Bank of America for $1 billion, alleging that the nation’s second-largest bank defrauded taxpayers by selling “defective” home loans to the federally-backed mortgage giants Fannie Mae and Freddie Mac.

The 46-page civil complaint centers on a lending program established by Countrywide Financial, the California-based mortgage originator purchased by Bank of America in 2008. Prosecutors allege that the program — referred to within Countrywide and Bank of America as “the Hustle” — was designed to process mortgages at a rapid speed without adequate checks on risk.

Thousands of loans processed between 2007 and 2009 were sold to Fannie and Freddie, which pump liquidity into the housing market by purchasing single-family residential mortgages from lenders. When the loans soured, Fannie and Freddie were left with heavy losses that would ultimately contribute to the decision to seek a combined $188 billion in federal aid. Losses from the Countrywide purchase similarly factored into Bank of America’s request for $45 billion in aid through the Troubled Asset Relief Program.

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” Preet Bharara, the U.S. attorney in Manhattan, said in a statement announcing the charges. “Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”

The charges come less than a month after Bank of America agreed to pay $2.43 billion to settle a class action lawsuit alleging it misled investors over its 2009 purchase of Merrill Lynch. They also follow a renewed effort by federal prosecutors to seek damages for alleged misconduct during the financial crisis. Earlier this month, for example, a federal mortgage task force accused JPMorgan Chase of “systemic fraud” in the sale of roughly $87 billion in mortgage-backed securities.

Countrywide originated the Hustle in response to huge losses it was suffering amid the housing market’s collapse. The firm eliminated checkpoints on loan quality, according to the complaint, “and compensated its employees solely based on the volume of loans originated.” Internal documents cited in the lawsuit found that the aim of the program was to have loans “move forward, never backward” and to clear “toll gates” along the loan origination process.

The case is not the first to raise questions about underwriting guidelines at Countrywide. In 2009, the Securities and Exchange Commission accused Angelo Mozilo, the former chief executive of the firm, of misrepresenting lending standards to investors. Mozilo settled the case the following year for $67.5 million.