On Wednesday, the U.S. Department of Justice filed its first civil fraud lawsuit against big mortgage financiers bailed out in 2008 by the U.S. government. In the fraud lawsuit, the DOJ accuses the Bank of America of selling thousands of toxic mortgages to Fannie Mae and Freddie Mac leading to the loss of close to $1 billion to taxpayers. The accusations were originally made by a whistleblower.
The lawsuit adds to the burden over mortgage related accusations faced by Bank of America, after it purchased Countrywide Finance Corp in July 2008.
The lawsuit graphically describes the “Hustle” scheme hatched by Countrywide and continued by Bank of America to bypass or ignore regulations and move the processing of residential home loans fast forward. The government alleged that mortgage executives had actively tried to remove “toll gates” that were in place to prevent fraudulent loans.
The “Hustle” approach of mortgage executives with the motto, “Loans Move Forward, Never Backward,” led to defect rates nearing 40 percent, which is about nine times the industry norm, but Countrywide hid the facts from both Fannie Mae and Freddie Mac. Countrywide even went as far as awarding bonuses to staff for rebutting the existence of the problems.
The lawsuit also alleged that despite soaring defaults and foreclosures, the Bank of America did not buy back many of the defaulted loans from the ‘Hustle’ scheme, which continued through 2009. U.S. Attorney Preet Bharara in Manhattan said, “The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope … Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
The lawsuit seeks triple damages under the federal False Claims Act, as well as civil fines.
However, Bank of America spokesman Lawrence Grayson said: “Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters. The claim that we have failed to repurchase loans from Fannie Mae is simply false. At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.”