Real Estate & Mortgage Insights

Finding the Housing Crisis Culprits

The U.S. government recently filed a lawsuit against Bank of America Corp., seeking at least $1 billion in damages for defrauding investors about the strength of its loans.

Although just one of a host of lawsuits filed during the past year by the government against major banks, this one could be one of the most effective cases for pinning the blame for the housing collapse on banking practices. Originally started by a whistleblower, this case alleges that after buying Countrywide Financial Corp., Bank of America continued a deceptive program already in place at Countrywide that removed obstacles to making risky and fraudulent loans.

Former Countrywide Executive Vice President Edward O'Donnell, who worked there from 2003 to 2009, helped file the case and alleged that Countrywide began an effort called "the Hustle" in 2007 after it started losing money with the collapse of the subprime mortgage market. The motto for loan officers was allegedly "Loans Move Forward, Never Backward" according to O'Donnell and it meant pushing loans quickly through the origination process, bypassing standard checks that would ensure loan quality. Employees were also awarded with bonuses for making the largest loans possible.

O'Donnell says Bank of America continued the scheme after buying Countrywide and that he was "one of the lone voices" speaking out about all the poorly underwritten loans.

And there certainly were plenty of toxic loans coming out of the Countrywide "hustle" factory. The "defect rates" on Countrywide loans was almost 40 percent, about nine times higher than standard at that time. Yet no mention was made of this to mortgage finance companies Fannie Mae and Freddie Mac when the loans were sold to them. In addition, if problems were found with the loans, the lawsuit alleges that employees were rewarded for "rebutting" them.

"The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," U.S. Attorney Preet Bharara for the Southern District of New York said. "Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill."

The lawsuit also alleges that Bank of America has refused to buy back the soured loans it sold to Fannie and Freddie, but the Bank denies it.

"Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters. The claim that we have failed to repurchase loans from Fannie Mae is simply false," said Lawrence Grayson, a bank spokesman. "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."

Whether or not Bank of America has bought back all of its toxic loans, so far it has already spent $40 billion on loan repurchases as well as mortgage litigation fees.

Bank of America is not the only bank being prosecuted for misleading investors. Citigroup and Deutsche Bank AG have already settled with the government and there are still cases in progress again Wells Fargo & CO and Allied Home Mortgage Corp.

So, do all these lawsuits and their allegations prove who caused the housing meltdown? Not completely. Both mortgage borrowers as well as mortgage-backed securities investors had a hand in the fraud and the disregard for loan safety, but if some banks were purposely defrauding investors, that certainly lays a lion's share of the burden at their feet.

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