On Wednesday, the Justice Department filed a civil lawsuit alleging that Bank of America stripped safeguards designed to catch mortgage fraud and then peddled the loans to government-backed Fannie and Freddie in what officials called a “spectacularly brazen” scheme.
This case, as well as dozens of others brought within the past 12 months or so, represents the culmination of the government’s labors to punish banks for the housing crisis that sent the economy into a tailspin four years ago. This reckoning has generated tens of billions of dollars in fines — although no top executives in handcuffs — and has rarely forced the banks to admit any culpability.
“This is an act of tiny margins relative to the size of the organizations and relative to the fraud committed,” said William K. Black, a former bank regulator who teaches economics and law at the University of Missouri. “Prosecutors can’t argue that these cases will serve as a deterrence when there have been no criminal indictments of senior executives.”
But lenders argue that the mounting cases, plus a host of new mortgage regulations coming into effect next year, will make it harder to issue loans, leaving less credit available for the still wobbly housing market.
Addressing the latest charges, Bank of America spokesman Lawrence Grayson said, “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.”
Bank of America “acted responsibly to resolve legacy mortgage matters,” Grayson said. “The claim that we failed to repurchase loans from Fannie Mae is simply false.”
Government officials contend that Bank of America was anything but responsible when it issued loans to home buyers and has resisted bearing the losses when those mortgages went bad — pressing Fannie and Freddie to cover the costs instead.
Much of Bank of America’s legal woes are tied to its $2.5 billion purchase of Countrywide Financial in 2008, once one of the nation’s largest home lenders. The bank has lost nearly $40 billion on mortgage litigation and repurchases of soured loans, according to a recent analysis by Credit Suisse.
According to the Justice Department’s complaint, filed in Manhattan federal court, Countrywide created a program in 2007 known as the “Hustle,” designed to ramp up the production of home loans for sale.
Officials alleged that the bank’s executives not only stripped safeguards but also awarded bonuses to employees based on the volume of mortgages they could issue. As a result, the “defect rates” were nine times higher than the industry norm. Yet Countrywide hid this from Fannie Mae and Freddie Mac.
The program ran through 2009, long after Bank of America purchased Countrywide.
“Countrywide and Bank of America systematically removed every check in favor of its own balance,” said Preet Bharara, U.S. attorney for the Southern District of New York. “This lawsuit should send another clear message that reckless lending practices will not be tolerated.”
The complaint was brought under the False Claims Act, which would enable the Justice Department to seek triple the amount in damages.
Bharara’s office has accused other banks of engaging in reckless and fraudulent mortgage lending to the detriment of the government. This month, the U.S. attorney filed a lawsuit against Wells Fargo for concealing the true nature of at least 6,320 shoddy mortgages that cost the Federal Housing Administration hundreds of millions of dollars in insurance claims.
That was just one in a blitz of recent cases brought by government officials.
Early this year, an array of big banks settled for $25 billion with state and federal officials over allegations they used falsified documents to evict homeowners facing foreclosure. The amount was the largest industry settlement since an agreement with tobacco companies in 1998.
Separately, Bank of America and Wells Fargo agreed to pay hundreds of millions to the Justice Department, which charged them with increasing mortgage rates for minorities. About a year ago, the Federal Housing Finance Agency in a single day filed lawsuits against 17 large banks for selling $200 billion in bad mortgages to Fannie and Freddie.
Several weeks ago, a state and federal task force put together by the Obama administration took on a division of JPMorgan Chase for allegedly deceiving investors who bought mortgage securities. Meanwhile, the Consumer Financial Protection Bureau, the federal watchdog, has been levying hundreds of millions of dollars in fines this year against the nation’s big credit card firms for a host of bad practices that lured in financially vulnerable customers.
Consumer groups cheer
Some consumer groups have been encouraged by these actions.
“We hope this level of accountability will restrict companies from pushing the envelope in the future so communities are not put at risk again, the way they were last time,” said Alys Cohen, a staff attorney at the National Consumer Law Center.
But others are concerned that the onslaught of litigation will wind up hurting borrowers as lenders become more circumspect about extending credit as the threat of lawsuits looms larger.
“This recent wave of lawsuits, regardless of the validity of the claims, clearly creates a challenge for those who believe that credit is too tight,” said David Stevens, president of the Mortgage Bankers Association. “The combined effect of regulation and litigation will simply mean that more middle-class Americans who are on the margin will have a hard time gaining access to homeownership.”
Stevens argues that the unending stream of lawsuits and fines has created an environment in which lenders are only comfortable making loans to Americans with stellar credit. The situation could become even more tense once regulators implement rules requiring banks to hold a piece of risky mortgages on their books next year.
But Cohen said it was “laughable” for banks to argue that government accountability would somehow restrict credit.
“Credit is restricted because of the crash, and the crash was caused by overreaching by lenders and Wall Street,” Cohen said. “Any notion that there shouldn’t be better rules of the road or that people who caused the crash shouldn’t be held accountable is missing the entire lesson of the last five years.”