Legal/Regulatory August 6, 2013, 4:02 pm

Justice Sues Bank of America Over Mortgage Securities


The Justice Department sued Bank of America on Tuesday, accusing the bank of defrauding investors by vastly underestimating the quality of mortgage-backed securities.

The lawsuit is the latest action by President Obama’s federal mortgage task force that has vowed to hold Wall Street accountable for misconduct in the packaging and sale of mortgage securities during the housing boom.

Bank of America, the Justice Department said, cloaked the risk associated with $850 million worth of securities backed by residential mortgages. In a corporate filing last week, Bank of America said it was bracing for the action.

Eric H. Holder Jr., the United States attorney general, said the lawsuit was “the latest step forward in the Justice Department’s ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct.”

As Bank of America assembled securities in 2008, the government claimed, the bank ignored that more than 40 percent of the mortgages included did not meet underwriting guidelines. Even though Bank of America knew about the troubled mortgages, the government said, the bank sold the securities anyway.

Unlike other lawsuits, this case zeros in on prime mortgages, rather than the subprime loans, the mortgages that became a hallmark of the 2008 financial crisis.
The lawsuit also takes aim at Bank of America’s own mortgage operations, rather than those of Countrywide, the troubled subprime lender that has created vast mortgage headaches for the bank since it was acquired.

The lawsuit is another blow for Bank of America, which is already reeling from a number of legal problems. Unlike many of its headaches that stem from its takeover of Countrywide Financial, which was once the nation’s biggest mortgage lender, the woes on Tuesday concern Bank of America’s own mortgages.

Prosecutors portrayed Bank of America’s mortgage operations as emblematic of Wall Street’s reckless practices in the heady days before the financial crisis. Under pressure to generate profits, the lawsuit said, Bank of America pressured employees to churn through mortgage evaluations. The instructions for slipshod standards stemmed from the top of the bank, the lawsuit said. One employee, according to the lawsuit, said that her job was to “basically validate the loans,” rather than to comb through them to spot flaws.

The goal, the employee said, was to get through mortgage applications swiftly. She was told by her superiors, prosecutors claimed to “keep her opinions to herself.”

Bank of America, the government said in its lawsuit, deliberately kept investors blind to the risks associated with the securities.

Justice Department’s lawsuit against Bank of America