NEW YORK -- The top federal prosecutor in Manhattan is suing Bank
of America for more than $1 billion for mortgage fraud against Fannie
Mae and Freddie Mac during the years around the financial crisis.
Attorney Preet Bharara said Countrywide Financial, which was later
bought by Bank of America, churned out mortgage loans from 2007 to 2009
without making sure that borrowers could afford them.
fraudulent conduct alleged in today's complaint was spectacularly brazen
in scope," Bharara said in a statement. He said the suit is partly to
recover money that Fannie and Freddie lost from defaulted loans.
Bank of America had no immediate comment.
sold the loans to Fannie Mae and Freddie Mac, which were left to pay
for the loans when they defaulted, according to the lawsuit. Fannie and
Freddie were effectively nationalized in 2008.
According to the
lawsuit, Countrywide used a process called "the Hustle," shorthand for
"High-Speed Swim Lane." The idea was that mortgage loans, as they were
being processed, would "move forward, never backward."
alleged that Countrywide traded quantity for quality and eliminated
underwriters, even from mortgage loans for which borrowers did not have
to have their income verified.
Instead, loan processors simply
entered data into an automated underwriting system, and if the system
gave the go-ahead, "no underwriter would ever see the loan," the lawsuit
With few checks and balances, there was "widespread falsification" of the data entered into the program, Bharara charged.
processors were given little guidance, the suit says. Checklists for
making sure that loans were compliant - for example, assessing whether
the income level that a borrower listed was reasonable - were
eliminated. Bonuses were based solely on how many loans an employee
could process, not the quality.
The lawsuit says Countrywide
executives were aware of the dangerous path they were treading. For
example, a quality review in January 2008 showed that 57% of Hustle
loans went into default.
Instead of notifying Fannie and Freddie,
Countrywide instead set about to conceal the quality of the loans it
was selling them, the suit said. It said Countrywide even offered a
bonus to quality-control workers who could "rebut" the default rates
that the review had found.
The lawsuit didn't give specifics, but
it accused Countrywide, and later Bank of America, of selling
"thousands" of Hustle loans to Fannie and Freddie. Bank of America
bought Countrywide in July 2008.
Fannie and Freddie buy mortgage
loans from banks, package them into securities and sell the securities
to investors. The idea is to give banks fresh cash to make more loans.
If a loan defaults, Fannie and Freddie guarantee payments to the
According to the lawsuit, Fannie and Freddie didn't
review the loans before they purchased them. Instead, they relied on
banks' statements that the loans met certain qualifications.
said the lawsuit was the first civil fraud suit brought by the Justice
Department concerning loans that were later sold to Fannie and Freddie.