[Vision2020] Justice Dept. Sues Bank of America Over Mortgage Securities

[Betsy Dickow]

At last.

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Subject: [Vision2020] Justice Dept. Sues Bank of America Over Mortgage
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DealBook - A Financial News Service of The New York Times
<http://dealbook.nytimes.com/> 

August 6, 2013, 4:02 pm 

Justice Dept. Sues Bank of America Over Mortgage Securities

By JESSICA SILVER-GREENBERG
<http://dealbook.nytimes.com/author/jessica-silver-greenberg/> 

The Justice Department sued Bank of America on Tuesday, accusing the bank of
defrauding investors by vastly understating the risks of the mortgages
backing about $850 million in securities.

The lawsuit adds to the hefty legal burden of the bank, which has been badly
battered by mortgage-related losses and litigation since the financial
crisis. The great bulk of those troubles stem from the bank's 2008
acquisition of the subprime lender Countrywide Financial.

Yet the latest litigation centers on Bank of America's own homegrown
mortgage operations. And the loans at issue were represented as prime jumbo
mortgages - at the time, 2007, loans of more than $417,000 for a single-unit
dwelling - rather than subprime mortgages, which were at the heart of the
mortgage crisis.

Those new elements were woven into a familiar narrative as the Justice
Department's lawsuit portrayed the bank's mortgage operations as emblematic
of Wall Street's reckless practices in the heady days before the financial
crisis.

Under pressure to generate profits, the lawsuit said, Bank of America pushed
employees to churn through mortgage evaluations. The instructions for
slipshod standards emanated from the upper echelons of the bank, the lawsuit
said.

One employee, according to the lawsuit, said that her job was to "basically
validate the loans," rather than to comb through them to spot flaws. The
goal, the employee said, was to get through mortgage applications swiftly.
She was told by her superiors, prosecutors said, to "keep her opinions to
herself."

In the end, the prime mortgages turned out to be far more dangerous than
investors were led to believe, the lawsuit contends. Bank of America
misrepresented the quality of the loans, and five investors lost about $100
million, the government said.

A spokesman for Bank of America contested the government's characterization
of its conduct.

"These were prime mortgages sold to sophisticated investors who had ample
access to the underlying data and we will demonstrate that," Lawrence
Grayson, a spokesman, said in a statement.

Bank of America disclosed last week in a corporate filing that it was
bracing for an action from the Justice Department. The Securities and
Exchange Commission filed a parallel action on Tuesday.

The lawsuit is the latest salvo from President Obama's federal mortgage task
force. Eric H. Holder Jr., the United States attorney general, said it was
"the latest step forward in the Justice Department's ongoing efforts to hold
accountable those who engage in fraudulent or irresponsible conduct."

Still more than five years after the housing market imploded, federal
prosecutors are still working to pin blame for problems that helped drive
the mortgage boom and then its demise. It is an effort that has generated
some frustration among the American public, fed up with the lack of criminal
prosecutions since the financial crisis, and a slew of civil lawsuits, some
of them seemingly repetitive, aimed at banks.

For Bank of America, the lawsuit on Tuesday follows a case from federal
prosecutors in New York. In that civil suit last year, federal prosecutors
claimed that Bank of America, through its Countrywide Financial unit,
defrauded the government by producing loans at such a fast clip that
controls were ignored.

The Justice Department's lawsuit on Tuesday also highlights a lack of
controls at the bank. An "unprecedented" number of the loans packaged and
sold to investors came from mortgage brokers, it said. As a result,
prosecutors said, the loans were shaky, at best.

At the time, Bank of America's chief executive, Kenneth D. Lewis, described
loans that came through such wholesale channels as "toxic waste," according
to the lawsuit.

Once the mortgages were originated, the government said, Bank of America
deliberately kept investors blind to the risks associated with the ensuing
securities. Bank of America, the government said, never told investors that
some of the mortgages included were so-called stated income and stated asset
loans, meaning that the bank never verified the income the borrowers claimed
to have.

Prosecutors said that investors were also deprived of critical knowledge
about the underlying mortgages, like the fact that 22 percent of the
borrowers were self-employed. The investments at issue were sold in 2008 to
five investors, including the Federal Home Loan Bank of San Francisco and
Wachovia Bank, which has since been acquired by Wells Fargo.

Without quality controls, the government said, trouble ensued. The number of
borrowers that fell behind on their payments was "abnormally high,"
according to the lawsuit. The turbulence "cannot be explained solely by the
downturn in the real estate market" alone. According to the government's
assessment, at least 23 percent of the mortgages had defaulted or were
delinquent as of June 2013.

The lawsuit cites 2007 e-mails from the bank's own securities traders
expressing frustration about the quality of mortgages. One trader wrote,
some were "like a fat kid in dodge ball, these need to stay on the
sidelines."

While the accusations add to the pressure on Bank of America, which has been
working to move past the crisis, previous government lawsuits against it
that began with much fanfare have lost some of their momentum.

In the United States attorney's lawsuit against Bank of America that was
filed in October, for example, prosecutors originally said that the
problematic home loan program known as the "hustle" was kept alive by Bank
of America through 2009.

But, last month, the government scaled back those accusations. The program
lasted through May 2008, not through December 2009, the government said in a
court filing.

 

Justice Department's lawsuit against Bank of America
<http://www.scribd.com/doc/158524630/Justice-Department-s-lawsuit-against-Ba
nk-of-America> 



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