Bank of America has been found liable for fraud in the sale of faulty loans by its Countrywide mortgage unit, a major victory for the federal government as it continues to pursue cases stemming from the financial crisis.
A federal jury in Manhattan sided with prosecutors who alleged Countrywide Financial Corp. churned out risky home loans in a process called “the Hustle” and then sold them to mortgage giants Fannie Mae and Freddie Mac.
The Calabasas company, once considered the crown jewel of American mortgage lending, made big profits unloading loans that were later rendered worthless during the housing crisis in 2008.
The decision is the first civil fraud verdict against Countrywide, and experts said the decision would probably invite more aggrieved investors to sue and could embolden other investigations aimed at Countrywide or other banks.
“That’s a very significant win for the government,” said Thomas Gorman, a partner at law firm Dorsey Whitney in Washington. “This kind of verdict will only strengthen government’s negotiating position and probably make other major banks reevaluate what their position is.”
In addition to ruling unanimously against BofA, jurors found former Countrywide executive Rebecca Mairone liable for her role in the case.
Federal prosecutors in Los Angeles had been unable to construct a criminal fraud case against Countrywide executives, including co-founder and Chairman Angelo Mozilo.
But three years ago, the Securities and Exchange Commission obtained what it said was the biggest-ever civil penalty from a corporate boss when Mozilo agreed to pay $67.5 million to avoid going to trial on allegations of fraud and insider trading. The SEC also settled with two of Mozilo’s top executives at Countrywide, which had been the nation’s largest home lender.
Countrywide was acquired by BofA during the height of the housing crisis. Preet Bharara, the U.S. attorney in Manhattan, whose office sued the bank, said the lender’s practices treated “quality control and underwriting as a joke.”
“In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow,” Bharara said in a statement. “That profit, however, was built on fraud, as the jury unanimously found.”
Bharara’s office, which filed the suit a year ago this week, is seeking $848 million in damages from the bank. Any penalties will be determined by a federal judge.
During the four-week trial, the bank contested the number of faulty loans and total losses at the heart of the case.
“The jury’s decision concerned a single Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” the bank said in a statement. “We will evaluate our options for appeal.”
The suit highlighted Countrywide programs aimed at getting employees to churn out mortgages as fast as possible.
Countrywide’s practices were some of the most egregious among subprime lenders, said Arthur Wilmarth Jr., a George Washington University law professor who consulted for the Financial Crisis Inquiry Commission.
“They along with Washington Mutual were [among] the worst of the banks,” Wilmarth said.
The courtroom victory could strengthen the federal government’s hand as it confronts other major Wall Street banks for conduct that contributed to the financial crisis.
The Justice Department and JPMorgan Chase & Co. have been working on a $13-billion settlement that would resolve a raft of federal and state probes stemming from faulty mortgage investments that fueled the financial crisis. A source familiar with the negotiations has said the deal could be announced as soon as this week.
In addition, the verdict may inspire the federal government to continue using a new weapon to fight Wall Street misdeeds.
After the financial crisis, prosecutors dusted off a 1980s law — the Financial Institutions Reform, Recovery and Enforcement Act — to pursue wrongdoing, said Jeffrey Manns, a law professor at George Washington University. Prosecutors used the law in the Countrywide case. The law was passed after the savings and loan crisis and allows the government to more easily prosecute for fraud that affects federally insured financial institutions.
“This is potentially a landmark case because it shows the government can successfully sue under this act,” Manns said.
Manns said the Countrywide case could have fallout for other cases, such as the Justice Department lawsuit against ratings firm Standard & Poor’s filed in Los Angeles. In that case, the government alleges that S&P helped inflate the housing bubble by assigning dubious ratings to mortgage investments chock-full of faulty loans.
“That case will now take place in the shadow of the Bank of America decision,” Manns said.
Courtesy of Los Angeles Times