Bank of America Corp., the second- biggest U.S. lender by assets, sold defective residential mortgage loans to Fannie Mae and Freddie Mac that later defaulted, the U.S. government said in a $1 billion fraud lawsuit against the bank.
The U.S. Justice Department filed the complaint today in Manhattan federal court, claiming the bank and its Countrywide Financial unit generated thousands of defective mortgage loans and sold them to Fannie Mae and Freddie Mac.
The lawsuit is the first by the Justice Department to allege fraud over mortgage loans sold to the two entities, Manhattan U.S. Attorney Preet Bharara said in a statement announcing the suit, which covers conduct from 2007 to 2009. Bank of America acquired Countrywide in 2008.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen,” Bharara said. “Through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, didn’t immediately return calls and an e-mail seeking comment on the complaint.
The lawsuit is the sixth brought against a major U.S. bank by the Justice Department in less than 18 months over what Bharara called “reckless mortgage practices in the lead-up to the financial crisis.”
Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.
The government said in the complaint that Bank of America “systematically removed every check” in the issuance of mortgages and then sold the “flawed” mortgages to Fannie Mae and Freddie Mac. Both relied on Bank of America’s assurances that the mortgages they purchased complied with their standards, the U.S. said.
According to the complaint, Countrywide initiated “the Hustle” in 2007 just as mortgage loan defaults were increasing nationally and Fannie Mae and Freddie Mac were tightening their loan purchasing standards to reduce risk. The Countrywide program did just the opposite, the U.S. said.
“The goals of the Hustle were high speed and high volume, where loans ‘move forward, never backward’ in the origination process,” Bharara said in his statement. “To accomplish these goals, the Hustle removed necessary quality control ‘toll gates’ that could slow down the origination process.”