Bank of America says the government may sue it over mortgage-backed securities

A U.S. attorney plans to recommend that the Justice Department file a civil lawsuit against Bank of America over its bundling of home loans into securities, the bank said Wednesday in a regulatory filing.

The disclosure is the latest sign that federal prosecutors remain steadfast in their efforts to hold Wall Street accountable for misconduct. It arrives as the Justice Department is negotiating a possible $13 billion settlement with JPMorgan Chase over bad mortgages, according to people familiar with the discussions who were not authorized to speak publicly. The department plans to use the case as a blueprint for reaching similar deals with other banks.

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In a quarterly filing Wednesday, Bank of America said a working group comprising state and federal prosecutors is investigating its purchase, packaging and underwriting of home loans and residential mortgage-backed securities. The bank did not disclose which U.S. attorney would be making the recommendation to the Justice Department.

There have been no formal charges filed against the bank, and the Justice Department and Bank of America declined to comment on whether a lawsuit is in the making.

The nation’s second-largest bank said it received a number of subpoenas in the third quarter from government authorities regarding its mortgage securities business. In light of the new legal troubles, the bank said losses tied to litigation could soar to as much as $5.1 billion, nearly double the $2.8 billion it projected previously.

Much of Bank of America’s legal troubles are tied to its $2.5 billion purchase of Countrywide Financial in 2008, once one of the nation’s largest home lenders. Bank officials say the ailing lender has cost the bank $40 billion in mortgage litigation and repurchases of soured loans.

And the legal expense keeps rising. Bank of America could face fines of up to $848.2 million after being found liable for fraud last week over thousands of defective mortgages sold by Countrywide. U.S. District Judge Jed Rakoff must decide on the penalty. Officials at the bank said the company is evaluating its options for appealing that decision.

 
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