In one of the first financial crisis mortgage cases to go to trial, Bank of America Corp.’s Countrywide unit has been found liable for defrauding Fannie Mae and Freddie Mac by selling them thousands of defective loans.
A federal jury in New York on Wednesday also found former Countrywide executive Rebecca Mairone liable for defrauding the U.S.
Mairone was the only individual named as a defendant in the government’s lawsuit. Countrywide was acquired by the Charlotte-based bank in 2008.
U.S. District Judge Jed Rakoff, who presided over the trial, previously told lawyers he will determine the amount of any civil penalty. The U.S. has requested more than $848 million, the gross loss to Fannie Mae and Freddie Mac as calculated by its expert, or an alternative penalty of more than $131 million, an amount equal to the estimated net loss.
“The jury's decision concerned a single Countrywide program that lasted several months and ended before Bank of America's acquisition of the company,” Bank of America spokesman Lawrence Grayson said in a statement. “We will evaluate our options for appeal.”
During the four-week trial, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara alleged that a division of Countrywide in August 2007 initiated a loan program called the “High Speed Swim Lane,” or HSSL, that ran until 2008.
Countrywide earned at least $165 million using HSSL, allowing the company to maintain revenue in a “cratering” market for subprime mortgages, the U.S. argued. Government- sponsored entities, or GSEs, such as Fannie Mae and Freddie Mac bought single-family mortgages from lenders.
Last year, the U.S. joined a whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell. The case is the first brought by the U.S. against a bank over defective mortgages to go to trial.
Mairone took the stand in her own defense, telling jurors she wasn’t part of a scheme to defraud Fannie Mae and Freddie Mac. She said Countrywide considered risks before instituting HSSL and came up with plans to deal with them.
Under the program, prosecutors said the speed with which more than 28,800 loans were processed was reduced to as little as 10 days from 60 days and safeguards were lifted to boost the number of loans the lender completed and sold to GSEs.
In closing arguments on Tuesday, Assistant U.S. Attorney Jaimie Nawaday said the case was “about greed and lies.” She cited e-mails in which Countrywide employees described some HSSL loans as “loser loans.” While some employees said the loans’ quality was “in the ditch,” they still sold them to Fannie Mae and Freddie Mac “for a quick profit,” she said.
Brendan Sullivan, a lawyer for Countrywide, told jurors in his closing arguments that the U.S. failed to prove any fraud occurred and evidence provided by the lender showed that only about 11,000 loans were processed under the HSSL program.
“The government is wrong,” Sullivan told jurors. “There is no fraud, no misrepresentations and no violations of law.”
Messages sent by O’Donnell during HSSL’s tenure show him lauding colleagues’ efforts on the program, endorsing it and supporting implementation of new measures, Sullivan said.
O’Donnell testified during the trial, which began Sept. 24 with jury selection, that he warned Countrywide executives including Mairone about the failure rate of HSSL loans. Under the program, Countrywide shifted the job of approving loans from trained underwriters to “loan specialists,” or clerks who lacked sufficient training, Nawaday said.
“The HSSL program was all about speed and volume and not about quality,” Nawaday said. “Quality was no more than a distraction.”
Other legal costs
Whatever penalty is assessed to Bank of America in this case will add to the more than $55 billion the bank has paid in legal costs and settlements since the financial crisis, more than any other bank.
Bank of America still faces a number of legal entanglements. Among the more prominent:
• The Federal Housing Finance Agency is reportedly pursuing a $6 billion settlement with Bank of America over mortgage-backed securities sold to Fannie Mae and Freddie Mac. That would resolve a 2011 lawsuit.
• An $8.5 billion settlement with a group of investors who held mortgage bonds Countrywide issued before the crisis still must be approved. Court hearings were held on the matter in September.
• A 2011 lawsuit filed by insurer AIG against Bank of America, Merrill Lynch and Countrywide is proceeding in two courthouses. The suit claims the bank misrepresented the quality of loans that went into more than 300 mortgage-backed securities.
• Lawsuits filed by the Justice Department and the Securities and Exchange Commission claim the bank misled investors about the risks of securities that were supposed to be backed by prime mortgage loans. The suits center on roughly $850 million worth of securities bought by five investors, including Wachovia Bank, from Bank of America in early 2008. Staff writers Andrew Dunn and Deon Roberts contributed.
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