Why is the Government Suing Bank of America Over Countrywide Mortgage?

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The federal government has poured billions of taxpayer dollars into Freddie Mac and Fannie Mae to keep them from failing completely as a result of the financial crisis and home mortgage meltdown of 2008. The lawsuit filed against Bank of America alleges that some fraudulent loan origination practices contributed to that near collapse.

The Federal National Mortgage Association, or Fannie Mae, came about during the Great Depression in order to help the country recover financially. Fannie Mae helped the recovery by purchasing home mortgages from mortgage lenders. By buying the loans, they provided the lending banks with more capital to use for creating more new loans. What Fannie Mae did was to create a secondary market for the loans by packaging them up into investment securities for sale. In order to make these securities attractive to buyers, Fannie Mae (and later, her sister agency Freddie Mac) guaranteed the loans. That is what the agencies still do. Defaulted loans in their securities portfolios are covered by the agencies.

When the financial crisis hit in 2008, so many home loans defaulted so quickly, Fannie Mae and Freddie Mac were overwhelmed and nearly failed. Both agencies had been independent corporations separate from the government for several decades, but to keep them from failing completely, and massively magnifying the financial crisis, the government stepped in and put them into receivership under the direction of the Federal Housing Finance Agency.

So what does the lawsuit claim that Bank of America did?

In order to guarantee loans bought from mortgage banks, Fannie Mae and Freddie Mac have quality standards for the loans they purchase. The agencies require and rely on due diligence performed by loan originators to ensure that the loans are solid. This is the issue at the heart of the government’s lawsuit.

The lawsuit alleges that a “fast lane” loan origination program at Countrywide put speed of loan processing over all other factors, including loan quality controls and standard underwriting procedures. This program, called the High-Speed Swim Lane program and very aptly nick named the “hustle,” emphasized speed over quality to such an extent that prosecutors describe it as having “abandoned” loan quality standards.

This program continued into 2009, well after Bank of America purchased Countrywide. Prosecutors claim that Bank of America knew that nearly a third of all hustle loans were defaulting and that the bank concealed this information when they sold the loans.

Was Bank of America/Countrywide the only one at fault?

No. The Federal Housing Finance Agency sued 17 big banks last year over losses to Fannie Mae and Freddie Mac from various mortgage related products. In addition, one has to ask; didn’t Fannie Mae and Freddie Mac have some responsibility too? Why did they buy and guarantee so many low quality loans? It is ironic that the agency created to help the United States to recover from a financial crisis, contributed to our most recent crisis.

Fannie Mae has finally begun to recover financially. Early in 2012, they were able to stop taking government assistance, and later in the year began to repay the bailout funds they had received. Repayments so far represent a tiny fraction of the taxpayer money that was required to keep them going.

These FHFA lawsuits are a second avenue to recovery of some of the bailout money. The Justice Department filed the Bank of America lawsuit under the False Claims Act. That could mean triple damages and bring in a penalty of more than three billion dollars.

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