What a complaint U.S. Attorney Preet Bharara filed against Countrywide and Bank of America on Wednesday!
Earlier this month, when the New York Attorney General filed accusations of securitization fraud against JPMorgan Chase, I said we should put aside cynicism about the AG’s copycat allegations and be grateful that, at last, a government official was demanding accountability for systemic corruption in the mortgage-bundling business. The new complaint against BofA demands no such nose-holding: It asserts powerfully detailed — and original — accusations of billion-dollar fraud in the way Countrywide approved mortgages destined for purchase by Fannie Mae and Freddie Mac, and in Countrywide’s and BofA’s subsequent (alleged) refusal to repurchase defective loans.
To be sure, the U.S. Attorney had help from a whistle-blower, a former Countrywide Home Loans executive vice president named Edward O’Donnell. O’Donnell filed a relatively bare-bones False Claims Act complaint last February. As always in FCA cases, the complaint was sealed as the Justice Department checked out the allegations and deliberated whether to intervene in the case. Those deliberations can take years, but not in this case, when the government is under intense pressure to make good on promises of fighting mortgage fraudsters. Eight months after O’Donnell initiated his action in federal court in Manhattan, the U.S. Attorney’s office intervened, making the suit public.
The result is a complaint that features inside allegations from O’Donnell about Countrywide’s so-called “Hustle” program to funnel increasingly deficient loans to Fannie Mae and Freddie Mac alongside inside information that government investigators presumably obtained from Fannie and Freddie officials. The combination makes for a compelling case that Countrywide systemically deceived the government-sponsored entities about the loans it was selling them, then refused to live up to contractual obligations to repurchase deficient loans. (As Reuters reported Monday, Bank of America said accusations that it failed to repurchase loans are “absolutely false.”)
The U.S. Attorney’s allegations go much deeper than O’Donnell’s initial suit, which suggests that the government has been busily investigating in the months since O’Donnell initiated the case. According to the complaint filed Wednesday, in 2007 — with fewer MBS sponsors in the market for the subprime loans that had been Countrywide’s specialty — the bank was increasingly desperate to sell supposedly better-quality mortgages to Fannie Mae and Freddie Mac. To speed up the process of approving loans, Countrywide’s Full Spectrum Lending unit instituted “the Hustle” (or HSSL, for High Speed Swim Lane) program, which stripped away underwriter review for loans that were deemed acceptable by the bank’s automated mortgage review system. But that automated system, according to the complaint, depended on information supplied by the borrower and input by a loan processor. There were few to no controls in the Hustle approval process; according to the feds, even loans in which the borrower’s income wasn’t independently verified went unreviewed by underwriters.