Counterparties: A billion more reasons for Bank of America to regret acquiring Countrywide

October 24, 2012

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The DOJ has filed a $1 billion civil lawsuit alleging that Countrywide committed fraud “spectacularly brazen in scope” by selling defective mortgages to Fannie Mae and Freddie Mac between 2007-2009. (Full PDF here).

Once the nation’s leading subprime lender, Countrywide was acquired Bank of America in 2008, and it has proven to be an epic money pit. Last month, David Benoit wrote that the acquisition had cost Bank of America at least $29 billion in settlement costs in the last 3 years. The WSJ says the bank has dished out something like $42 billion since 2010, if you include reserves and expenses.

Interestingly, the  DOJ’s lawsuit doesn’t focus on subprime. After the subprime market began to collapse in 2007, the suit contends, Countrywide’s strategy shifted to originating the kind of high-quality mortgages that could be sold to Fannie and Freddie. Countrywide allegedly used a program called the “hustle” to pretend it was originating those kind of mortgages:

The aim of the Hustle (or “HSSL,” for “High Speed Swim Lane”) was to have loans “move forward, never backward” and to remove unnecessary “toll gates” slowing down the loan origination process. In furtherance of these aims, Countrywide’s new origination model removed the processes responsible for safeguarding loan quality and preventing fraud.

Instead of adhering to Fannie and Freddie’s mortgage standards, Countrywide allegedly “assigned critical underwriting tasks to loan processors who were previously considered unqualified to even answer borrower questions.” Employees got a one-time bonus for “rebutting” concerns from the company’s internal quality control department. “Even when detected, loan processors manipulating data typically faced no consequences”, the lawsuit says.

The government is bringing the suit under the increasingly popular False Claims Act and a relatively obscure statute called FIRREA. Earlier this month, the DOJ also brought a similar mortgage-related False Claims action against Wells Fargo; Citi settled its own case earlier this year for $158.3 million. FIRREA, a carry-over from the savings and loan crisis, is relatively unproven, but gives the government more leeway in bringing a civil suit.

As Matt Levine notes, Bank of America is being sued by the DOJ at the same time that it’s fighting over billions in mortgage put-backs with Fannie and Freddie. The law also could lead to some  mind-boggling penalties for the bank:

Not only might Countrywide have to pay twice for the same mortgage – once to Fannie/Freddie on a putback, once to the DOJ on this lawsuit – but this lawsuit itself might lead to triple damages plus $1 million per mortgage. If Countrywide was in fact massively fraudy in 2007-2009, there is good reason to make that massive fraud more costly than just buying back all the mortgages that it originated.

The suit also identifies a former Countrywide executive vice president as a whistleblower, who may soon become quite rich. In July, a contractor hired by Countrywide pulled in $14.6 million for blowing the whistle on inflated appraisals.  – Ryan McCarthy

On to today’s links:

Missed Oppurtunities
Blame Congress’s fear of immigration for America’s lack of engineers – Evan Soltas

Facebook
Facebook mobile revenue has suddenly exploded – Rolfe Winkler

New Normal
Neither candidate has discussed America’s biggest challenge: A decade of income stagnation – David Leonhardt
Obesity is up in nearly every age group in the US over the last 4 years – Gallup

Inefficient Markets
FactSet misinterprets facts – Businessweek

Long Reads
Nate Silver and the renaissance of political prediction markets – Chadwick Matlin

Demographics
The housing market will be saved by “echo boomers” – Sober Look
On the connection between obesity and debt – Azizonomics

Defenestrations
White House quietly saying it will oust Fannie’s regulator after election – Shahien Nasiripour

Strangely Existential
Behavioral economics suggests that your brain thinks of your future self as a stranger – Cass Sunstein

Politicking
Obama knows his Reinhart & Rogoff: “Recessions that follow a financial crash…are not regular recessions” – Des Moines Register

Official Statements
Americans misunderstand how much time bankers spend reading to children – Partnership for a Secure Financial Future

Bubbly
Prime real estate in Mecca now sells for $18,000 per square foot – Guardian

Lies of Omission
Another Breguet goes missing in Russia – NYT

Explainers
Matt Levine on how derivatives help banks get around regulation – Planet Money

Amazing
The politics of Dillon, Texas – The Monkey Cage

EU Mess
Mervyn King: There won’t be a recovery until banks recapitalize – Telegraph

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