The latest federal lawsuit over allegedmortgage fraud paints an unflattering picture of a doomed lender: Executives atCountrywide Financial urged workers to churn out loans, accepted fudgedapplications and tried to hide ballooning defaults.
The suit, filed Wednesday by the topfederal prosecutor in Manhattan, also underscored how Bank of America'spurchase of Countrywide in July 2008, just before the financial crisis, backfiredseverely.
The prosecutor, Preet Bharara, said hewas seeking more than $1 billion, but the suit could ultimately recover muchmore in damages.
"This lawsuit should send anotherclear 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 immediatecomment.
Countrywide was a giant in mortgagelending, but was also known for approving exotic, even risky, loans. By 2007,as the market for subprime mortgages collapsed, Countrywide was anxious forrevenue.
The lawsuit alleged that the companyloosened its standards for making loans while telling Fannie Mae and FreddieMac, which were buying loans from Countrywide, that standards were gettingtighter.
Fannie and Freddie, which packaged loansinto securities and sold them to investors, were effectively nationalized in2008 when they nearly collapsed under the weight of their mortgage losses.
To churn out more mortgage loans, Bhararasaid, Countrywide introduced a program called the "Hustle," shorthandfor "High-Speed Swim Lane." It operated under the motto, "LoansMove Forward, Never Backward."
The program eliminated checks meant toensure that mortgages were being made to borrowers who could afford them,according to the lawsuit.
For example, loan processors no longerhad to complete worksheets that helped them assess whether income levels thatborrowers entered on their loan applications were reasonable.
If processors entered a borrower'sinformation into a computerized underwriting program and the program raisedflags, employees were encouraged to change the numbers, the suit said.
It also said that bonuses were awardedbased solely on the number of loans that an employee could generate, not ontheir quality.
The process led to "widespreadfalsification" of mortgage data, Bharara charged. And when Countrywideexecutives became aware of the dangerously high number of borrowers defaulting,it hid the problem, according to the lawsuit.
In early 2008, for example, Countrywideoffered bonuses for employees who could "rebut" the high rate ofdefaults. The standards were low, according to the lawsuit: If a review foundthat the income a borrower listed on his application seemed unreasonable, anemployee could rebut the finding "simply by arguing that the stated incomewas reasonable."
The lawsuit gives seven examples ofmortgages made for homes in California, Alabama, Florida and Georgia in whichthe borrowers' income and other qualifications were falsified.
For example, one loan application, for ahome in Miami, said that the borrower was an airline sales representativeearning $15,500 per month, when the borrower worked for a temp agency andearned $2,666 per month. The borrower defaulted within seven months, the suitsaid.
A loan application for a home inBirmingham, Alabama, failed to disclose $81,000 in debt that the borrower wascarrying. That borrower defaulted within a year, the suit said.
The lawsuit accused Countrywide, andlater Bank of America, of selling thousands of Hustle loans to Fannie andFreddie. The lawsuit says that that the Hustle program continued through 2009.
According to the lawsuit, Fannie andFreddie don't review loans before they purchased them. Instead, they relied onbanks' statements that the loans met certain qualifications.
Bharara said the lawsuit was the firstcivil fraud suit brought by the Justice Department concerning loans later soldto Fannie and Freddie. When Fannie and Freddie collapsed, investors were wipedout.
Taxpayers have spent $170 billion tokeep Fannie and Freddie afloat, and it could cost $260 billion more to supportthe companies through 2014 after subtracting dividend payments to taxpayers,according to the government.
The lawsuit says that Fannie and Freddiesuffered $1 billion in losses because they had to pay for Countrywide'sdefaulted loans. The lawsuit also complains that Bank of America is refusing tobuy back mortgages "even where the loans admittedly contained materialdefects or even fraudulent misrepresentations."
Bank of America's purchase ofCountrywide originally earned it plaudits from lawmakers because Bank ofAmerica was viewed as stepping in to eliminate a bad actor from the mortgagemarket.
But the purchase, instead of paddingBank of America's mortgage business, has drawn a drumbeat of regulatory fines, lawsuits andlosses.
Bank of America reported last week thatwhile it is issuing more mortgages — $21 billion worth last quarter, up 18percent from a year earlier — its mortgage unit is still losing money as thebank works through crisis-era problems.
In the past year and a half, Bharara'soffice has settled lawsuits against CitiMortgage, Flagstar Bank and DeutscheBank over mortgages. Its lawsuits against Wells Fargo and Allied Home Mortgageare pending.