Information provided by PRNewswire
Federal prosecutors in New York have just filed suit against Bank of America, claiming that its "brazen" mortgage fraud led to the housing industry's collapse and made the problems worse after the recession officially began. What exactly is Bank of America accused of? The allegations stem from a company that Bank of America bought out in 2008 called Countrywide Financial Corporation – and this isn't the first time Bank of America has been in hot water over Countrywide.
Back in the mid-2000's, Countrywide was very busy giving out home loans. In fact, by the time Countrywide was bought out by Bank of America, it had given out $500 billion in home loans. However, once the housing bubble burst, Countrywide went bankrupt – which is how Bank of America wound up with it.
The problem? In 2009, it was discovered that higher-ups at Countrywide had engaged in insider trading during the housing boom– which is how they had so much money to give out in the first place. Their punishment was to pay nearly $70 million in penalties. Since Bank of America now owned Countrywide, it was responsible for footing the bill.
Today, Bank of America is being sued for issues related to Countrywide. Specifically, Countrywide is accused of defrauding the government-backed mortgage agencies by giving out loans without having the proper controls in place. In layman's terms, it means Countrywide is accused of giving out home loans recklessly, without checking to see if it was going to people who deserved it or not – and doing so knowing that taxpayer money would be there to pay the bills if things went wrong. How were they able to get away with this, especially since there have been so many new regulations put into place ever since the housing bubble burst?
According to federal prosecutors, it was all part of a scheme called "The Hustle". Countrywide allegedly came up with the scheme. Then, when Bank of America took over in 2008, they kept the scheme going for at least a year.
Federal prosecutors say "The Hustle" went to great lengths to keep Freddie Mac and Fannie Mae in the dark about risky borrowers. According to the lawsuit, officials at Countrywide and Bank of America went so far as to replace experienced underwriters with unqualified ones, manipulate loan forms, write down higher income numbers for applicants, and even conceal the number of loans that were defaulting before selling them to the government. Sources close to the case say it is one of the most "brazen" schemes they have ever seen. What does Bank of America have to say about all of this? In a statement, Bank of America said that it had repurchased some of the failed loans from Fannie Mae and Freddie Mac, but that it cannot be expected to buy back every single loan that defaulted during the recession. What kind of punishment does Bank of America face if it loses in court? Since the Department of Justice filed the lawsuit under the False Claims Act, Fannie Mae and Freddie Mac may be entitled to triple the amount of damages they suffered if they win. In this case, that means Bank of America could end up owing them $3 billion.
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