US suit alleges ‘brazen’ fraud at Countrywide

In this June 25, 2008 file photo, build­ings and palm trees are reflected on the entrance of the Coun­try­wide Finan­cial Corp. office in Bev­erly Hills, Calif. The top fed­eral pros­e­cu­tor in Man­hat­tan sued Bank of Amer­ica for more than $1 bil­lion on Wednes­day for mort­gage fraud against Fan­nie Mae and Fred­die Mac dur­ing the years around the finan­cial cri­sis. (AP Photo/Kevork Djansez­ian, file)

CHRISTINA REXRODE

AP Busi­ness Writer

NEW YORK — The lat­est fed­eral law­suit over alleged mort­gage fraud paints an unflat­ter­ing pic­ture of a doomed lender: Exec­u­tives at Coun­try­wide Finan­cial urged work­ers to churn out loans, accepted fudged appli­ca­tions and tried to hide bal­loon­ing defaults.

The suit, filed Wednes­day by the top fed­eral pros­e­cu­tor in Man­hat­tan, also under­scored how Bank of America’s pur­chase of Coun­try­wide in July 2008, just before the finan­cial cri­sis, back­fired severely.

The pros­e­cu­tor, Preet Bharara, said he was seek­ing more than $1 bil­lion, but the suit could ulti­mately recover much more in damages.

“This law­suit should send another clear mes­sage that reck­less lend­ing prac­tices will not be tol­er­ated,” Bharara said in a state­ment. He described Countrywide’s prac­tices as “spec­tac­u­larly brazen in scope.”

Bank of Amer­ica had no imme­di­ate comment.

Coun­try­wide was a giant in mort­gage lend­ing, but was also known for approv­ing exotic, even risky, loans. By 2007, as the mar­ket for sub­prime mort­gages col­lapsed, Coun­try­wide was anx­ious for revenue.

The law­suit alleged that the com­pany loos­ened its stan­dards for mak­ing loans while telling Fan­nie Mae and Fred­die Mac, which were buy­ing loans from Coun­try­wide, that stan­dards were get­ting tighter.

Fan­nie and Fred­die, which pack­aged loans into secu­ri­ties and sold them to investors, were effec­tively nation­al­ized in 2008 when they nearly col­lapsed under the weight of their mort­gage losses.

To churn out more mort­gage loans, Bharara said, Coun­try­wide intro­duced a pro­gram called the “Hus­tle,” short­hand for “High-Speed Swim Lane.” It oper­ated under the motto, “Loans Move For­ward, Never Backward.”

The pro­gram elim­i­nated checks meant to ensure that mort­gages were being made to bor­row­ers who could afford them, accord­ing to the lawsuit.

For exam­ple, loan proces­sors no longer had to com­plete work­sheets that helped them assess whether income lev­els that bor­row­ers entered on their loan appli­ca­tions were reasonable.

If proces­sors entered a borrower’s infor­ma­tion into a com­put­er­ized under­writ­ing pro­gram and the pro­gram raised flags, employ­ees were encour­aged to change the num­bers, the suit said.

It also said that bonuses were awarded based solely on the num­ber of loans that an employee could gen­er­ate, not on their quality.

The process led to “wide­spread fal­si­fi­ca­tion” of mort­gage data, Bharara charged. And when Coun­try­wide exec­u­tives became aware of the dan­ger­ously high num­ber of bor­row­ers default­ing, it hid the prob­lem, accord­ing to the lawsuit.

In early 2008, for exam­ple, Coun­try­wide offered bonuses for employ­ees who could “rebut” the high rate of defaults. The stan­dards were low, accord­ing to the law­suit: If a review found that the income a bor­rower listed on his appli­ca­tion seemed unrea­son­able, an employee could rebut the find­ing “sim­ply by argu­ing that the stated income was reasonable.”

The law­suit gives seven exam­ples of mort­gages made for homes in Cal­i­for­nia, Alabama, Florida and Geor­gia in which the bor­row­ers’ income and other qual­i­fi­ca­tions were falsified.

For exam­ple, one loan appli­ca­tion, for a home in Miami, said that the bor­rower was an air­line sales rep­re­sen­ta­tive earn­ing $15,500 per month, when the bor­rower worked for a temp agency and earned $2,666 per month. The bor­rower defaulted within seven months, the suit said.

A loan appli­ca­tion for a home in Birm­ing­ham, Ala., failed to dis­close $81,000 in debt that the bor­rower was car­ry­ing. That bor­rower defaulted within a year, the suit said.

The law­suit accused Coun­try­wide, and later Bank of Amer­ica, of sell­ing thou­sands of Hus­tle loans to Fan­nie and Fred­die. The law­suit says that that the Hus­tle pro­gram con­tin­ued through 2009.

Accord­ing to the law­suit, Fan­nie and Fred­die don’t review loans before they pur­chased them. Instead, they relied on banks’ state­ments that the loans met cer­tain qualifications.

Bharara said the law­suit was the first civil fraud suit brought by the Jus­tice Depart­ment con­cern­ing loans later sold to Fan­nie and Fred­die. When Fan­nie and Fred­die col­lapsed, investors were wiped out.

Tax­pay­ers have spent $170 bil­lion to keep Fan­nie and Fred­die afloat, and it could cost $260 bil­lion more to sup­port the com­pa­nies through 2014 after sub­tract­ing div­i­dend pay­ments to tax­pay­ers, accord­ing to the government.

The law­suit says that Fan­nie and Fred­die suf­fered $1 bil­lion in losses because they had to pay for Countrywide’s defaulted loans. The law­suit also com­plains that Bank of Amer­ica is refus­ing to buy back mort­gages “even where the loans admit­tedly con­tained mate­r­ial defects or even fraud­u­lent misrepresentations.”

Bank of America’s pur­chase of Coun­try­wide orig­i­nally earned it plau­dits from law­mak­ers because Bank of Amer­ica was viewed as step­ping in to elim­i­nate a bad actor from the mort­gage market.

But the pur­chase, instead of padding Bank of America’s mort­gage busi­ness, has drawn a drum­beat of reg­u­la­tory fines, law­suits and losses.

Bank of Amer­ica reported last week that while it is issu­ing more mort­gages — $21 bil­lion worth last quar­ter, up 18 per­cent from a year ear­lier — its mort­gage unit is still los­ing money as the bank works through crisis-era problems.

In the past year and a half, Bharara’s office has set­tled law­suits against Citi­Mort­gage, Flagstar Bank and Deutsche Bank over mort­gages. Its law­suits against Wells Fargo and Allied Home Mort­gage are pending.

Posted by AP News on Oct 24 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.