(By Balachander) Bank of America Corp. (NYSE: BAC) is being sued by the federal government for multi-year mortgage fraud against Fannie Mae and Freddie Mac.
The complaint alleges that the second-biggest U.S. bank by assets misrepresented the quality of home loans it sold to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
The complaint, filed in federal court in Manhattan, seeks over $1 billion in damages under the federal False Claims Act, as well as civil penalties.
The government alleges Countrywide, which Bank of America bought in July 2008, rolled out a new "streamlined" loan origination model called the "Hustle" in 2007.
To increase the speed at which Countrywide originated and sold loans to the companies, Countrywide eliminated every single checkpoint on laon quality and compensated its employees solely based on the volumes of loans originates, leading to rampant instances of fraud and other serious loan defects, the complaint alleged.
According to the lawsuit, the "Hustle" was never disclosed to Fannie Mae and Freddie Mac although the vast majority of its resulting loans were funneled to the GSEs with the knowing misrepresentation that they were investment-quality loans that compiled with the GSE requirements.
Indeed, Countrywide represented to the GSEs that it had strengthened its underwriting guidelines in late 2007, shortly after it had fully implemented the "Hustle".
Countrywide and Bank of America also refused to repurchase Hustle loans or reimburse the GSEs for losses already incurred, even where the loans admittedly contained material defects or even fraudulent misrepresentations, the government alleged.
"As a result of the Hustle, Countrywide and later Bank of America defrauded the GSEs of more than $1 billion," the government said.
Fannie Mae and Freddie Mac is engaged in the purchase of single-family residential mortgages from lenders, package them into securities and sell them to investors.
On Wednesday, BAC shares added 3 cents or 0.27 percent to trade at $9.39.