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<span class="" title="2013-08-06T16:02:42+00:00">August 6, 2013, <span>4:02 pm</span></span>
<h3 class="">Justice Dept. Sues Bank of America Over Mortgage Securities</h3>
<address class="">By <a href="http://dealbook.nytimes.com/author/jessica-silver-greenberg/" class="" title="See all posts by JESSICA SILVER-GREENBERG">JESSICA SILVER-GREENBERG</a></address>
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<p>The Justice Department sued Bank of America on Tuesday, accusing the
bank of defrauding investors by vastly understating the risks of the
mortgages backing about $850 million in securities.</p><p>The lawsuit
adds to the hefty legal burden of the bank, which has been badly
battered by mortgage-related losses and litigation since the financial
crisis. The great bulk of those troubles stem from the bank’s 2008
acquisition of the subprime lender Countrywide Financial.</p><p>Yet the
latest litigation centers on Bank of America’s own homegrown mortgage
operations. And the loans at issue were represented as prime jumbo
mortgages — at the time, 2007, loans of more than $417,000 for a
single-unit dwelling — rather than subprime mortgages, which were at the
heart of the mortgage crisis.</p><p>Those new elements were woven into a
familiar narrative as the Justice Department’s lawsuit portrayed the
bank’s mortgage operations as emblematic of Wall Street’s reckless
practices in the heady days before the financial crisis.</p><p>Under
pressure to generate profits, the lawsuit said, Bank of America pushed
employees to churn through mortgage evaluations. The instructions for
slipshod standards emanated from the upper echelons of the bank, the
lawsuit said.</p><p>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 said, to “keep her opinions to herself.”</p><p>In the end,
the prime mortgages turned out to be far more dangerous than investors
were led to believe, the lawsuit contends. Bank of America
misrepresented the quality of the loans, and five investors lost about
$100 million, the government said.</p><p>A spokesman for Bank of America contested the government’s characterization of its conduct.</p><p>“These
were prime mortgages sold to sophisticated investors who had ample
access to the underlying data and we will demonstrate that,” Lawrence
Grayson, a spokesman, said in a statement.</p><p>Bank of America
disclosed last week in a corporate filing that it was bracing for an
action from the Justice Department. The Securities and Exchange
Commission filed a parallel action on Tuesday.</p><p>The lawsuit is the
latest salvo from President Obama’s federal mortgage task force. Eric H.
Holder Jr., the United States attorney general, said it was “the latest
step forward in the Justice Department’s ongoing efforts to hold
accountable those who engage in fraudulent or irresponsible conduct.”</p><p>Still
more than five years after the housing market imploded, federal
prosecutors are still working to pin blame for problems that helped
drive the mortgage boom and then its demise. It is an effort that has
generated some frustration among the American public, fed up with the
lack of criminal prosecutions since the financial crisis, and a slew of
civil lawsuits, some of them seemingly repetitive, aimed at banks.</p><p>For
Bank of America, the lawsuit on Tuesday follows a case from federal
prosecutors in New York. In that civil suit last year, federal
prosecutors claimed that Bank of America, through its Countrywide
Financial unit, defrauded the government by producing loans at such a
fast clip that controls were ignored.</p><p>The Justice Department’s
lawsuit on Tuesday also highlights a lack of controls at the bank. An
“unprecedented” number of the loans packaged and sold to investors came
from mortgage brokers, it said. As a result, prosecutors said, the loans
were shaky, at best.</p><p>At the time, Bank of America’s chief
executive, Kenneth D. Lewis, described loans that came through such
wholesale channels as “toxic waste,” according to the lawsuit.</p><p>Once
the mortgages were originated, the government said, Bank of America
deliberately kept investors blind to the risks associated with the
ensuing securities. Bank of America, the government said, never told
investors that some of the mortgages included were so-called stated
income and stated asset loans, meaning that the bank never verified the
income the borrowers claimed to have.</p><p>Prosecutors said that
investors were also deprived of critical knowledge about the underlying
mortgages, like the fact that 22 percent of the borrowers were
self-employed. The investments at issue were sold in 2008 to five
investors, including the Federal Home Loan Bank of San Francisco and
Wachovia Bank, which has since been acquired by Wells Fargo.</p><p>Without
quality controls, the government said, trouble ensued. The number of
borrowers that fell behind on their payments was “abnormally high,”
according to the lawsuit. The turbulence “cannot be explained solely by
the downturn in the real estate market” alone. According to the
government’s assessment, at least 23 percent of the mortgages had
defaulted or were delinquent as of June 2013.</p><p>The lawsuit cites
2007 e-mails from the bank’s own securities traders expressing
frustration about the quality of mortgages. One trader wrote, some were
“like a fat kid in dodge ball, these need to stay on the sidelines.”</p><p>While
the accusations add to the pressure on Bank of America, which has been
working to move past the crisis, previous government lawsuits against it
that began with much fanfare have lost some of their momentum.</p><p>In
the United States attorney’s lawsuit against Bank of America that was
filed in October, for example, prosecutors originally said that the
problematic home loan program known as the “hustle” was kept alive by
Bank of America through 2009.</p><p>But, last month, the government
scaled back those accusations. The program lasted through May 2008, not
through December 2009, the government said in a court filing.</p><p> </p><p style="margin:12px auto 6px;font-family:Helvetica,Arial,Sans-serif;font-style:normal;font-variant:normal;font-weight:normal;font-size:14px;line-height:normal;font-size-adjust:none;font-stretch:normal;display:block">
<a href="http://www.scribd.com/doc/158524630/Justice-Department-s-lawsuit-against-Bank-of-America">Justice Department’s lawsuit against Bank of America</a></p><br clear="all"></div></div></div><br>-- <br>Art Deco (Wayne A. Fox)<br>
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