Do The Hustle-US sues Bank of America, alleging $1 billion in mortgage fraud

BusinessMirror - US sues Bank of America, alleging $1 billion in mortgage fraud:

'via Blog this'The lawsuit is the latest chapter in the Charlotte bank’s long-running legal woes, which have pummeled the bank’s earnings and stock price. Bank of America has already lost billions of dollars in write-downs and legal settlements related to lending practices at Countrywide, which Bank of America acquired during the financial crisis, and the acquisition of Merrill Lynch.

New York-based US Attorney Preet Bharara said on Wednesday that Countrywide generated thousands of fraudulent home loans through a process known as the “Hustle,” which involved processing home loans at high speed and without quality checkpoints.

And the lawsuit contends that the Hustle, or HSSL—which stood for “High Speed Swim Lane”—continued after Bank of America completed the Countrywide acquisition.

The loans were sold to Fannie Mae and Freddie Mac and later defaulted at a far higher rate than normal, causing more than $1 billion in losses and numerous foreclosures, the US attorney’s office said in a statement. Both Fannie and Freddie were bailed out by taxpayers in 2008 at a cost of billions of dollars.

“According to internal Countrywide documents, the aim of the Hustle...was to have loans ‘move forward, never backward,’” the lawsuit said. “Countrywide eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud.”

To speed up loan origination, Countrywide removed underwriter review even from high-risk loans, and assigned underwriting jobs to “loan processors who were previously considered unqualified even to answer borrower questions,” the lawsuit said. Countrywide also eliminated its “compliance specialist” positions, which had been responsible for independent loan checks, and eliminated mandatory underwriting checklists.

At the same time, Countrywide indicated to Fannie Mae and Freddie Mac that it had strengthened its underwriting standards, the lawsuit alleges.

(Ie. they lied)

Up to 40 percent of the resulting loans in some months turned out to have material defects, which the lawsuit says was 10 times the industry rate. For stated income loans, a type of subprime loan in which borrowers didn’t have to provide any proof of income, the rate of materially defective loans rose to 70 percent in January 2008.

Countrywide also deliberately ignored internal warnings that the program was generating a high level of bad loans, and suppressed loan quality reviews, according to the lawsuit. The company went so far as to offer employees a bonus for rebutting the Countrywide’s own quality-control department’s findings of defective loans, the lawsuit alleges.

The pressure and incentives to originate loans as rapidly as possible led to unchecked fraud, prosecutors said. They cite several specific examples of loans that were sold to Freddie and Fannie as investment-quality, but were later discovered to have serious problems.

In an August 2007 home loan in Birmingham, Alabama, the loan file said the borrower earned $10,000 per month as a “self-employed real-estate investor,” with no verification of his business. In the same month in Miami, Countrywide made a loan to a person whose loan file said the borrower was a sales representative for an airline earning $15,500 per month. The borrower was actually a temporary agency employee who made $2,666 per month.

The borrowers defaulted within months of closing.

Wednesday’s case is the latest in a series of government actions seeking fines and other penalties from housing lenders in the wake of the financial crisis.

The government has brought five other civil fraud lawsuits against lenders, accusing them of reckless mortgage lending. In February the US settled with Citigroup for $158.3 million and Flagstar Bank for $132.8 million. The government settled with Deutsche Bank and its subsidiary MortgageIT for $202.3 million in May. A suit against Allied Home Mortgage Corp. is ongoing, as is the suit against Wells Fargo.