Bank of America Corp.’s Countrywide unit placed profits over quality in a “massive fraud” selling shoddy mortgages to Fannie Mae and Freddie Mac, a U.S. government lawyer said on Tuesday.
The claim came at the start of the first case by the government to go to trial against a major bank over defective mortgage practices leading up to the 2008 financial crisis.
Pierre Armand, a lawyer in the civil division of the U.S. Attorney’s Office in Manhattan, said Countrywide made $165 million selling loans that it promised were investment quality to Fannie and Freddie.
“What documents and witnesses will show is that the promise of quality was largely a joke,” Armand said.
But Brendan Sullivan, a lawyer for Bank of America, said Countrywide had sought to ensure the loans it made were good and that no fraud occurred.
“No fraud,” he said. “Two words. That’s the heart and soul and body of the defense. No fraud. And that’s what the evidence will show.”
Filed in October, the lawsuit blames the bank for losses suffered by Fannie Mae and Freddie Mac on thousands of prime mortgages that later defaulted. Fannie and Freddie, government-sponsored enterprises that underwrite mortgages, were taken over by the government in 2008.
The Justice Department says the loans were pushed out through a Countrywide program called the “High Speed Swim Lane” – also called “HSSL” or “Hustle” – that began in 2007 amid rising mortgage delinquency and default rates and as Fannie and Freddie were tightening underwriting guidelines.
The program was overseen by Rebecca Mairone, a former chief operating officer of Countrywide’s Full Spectrum Lending division, who is a co-defendant in the lawsuit and today works at JPMorgan Chase & Co.
The lawsuit is brought under the Financial Institutions Reform, Recovery, and Enforcement Act. The law, passed in the wake of the 1980s savings-and-loan scandals, covers fraud affecting federally insured financial institutions.
The Justice Department estimates Fannie and Freddie has a gross loss of $848.2 million on the Countrywide HSSL loans, though their net loss on loans it says were materially defective was $131.2 million.
The jury of six women and four men includes a musician, an investment bank employee and a retired civil engineer.
During opening statements before U.S. District Judge Jed Rakoff, Armand said that under the HSSL program, Countrywide slashed loan quality checkpoints by removing underwriters from the review process and began paying employees based the volume and speed of the loans they produced.
The result was an increase in bad loans, Armand said. Yet those loans were then sold to Fannie and Freddie, even though Countrywide knew homeowners couldn’t pay many of them back.
“Hustle was not about quality,” Armand said. “It was about speed. It was about volume. It was about profits.”
But Sullivan, a lawyer at Williams & Connolly, said that Countrywide never intended to defraud Fannie or Freddie. He called Countrywide’s employees “normal well-intentioned people” who never believed they were in a scheme to defraud anyone.
Fannie and Freddie were enormous mortgage companies who “knew the risks, knew the process,” and knew Countrywide, he said. They never complained about loan quality, he said.
Removing underwriters wasn’t intended to cause fraud but instead was done because at the time, prime loans were considered less risky than the subprime loans the Full Spectrum Lending division had previously handled, he said.
And while the division began relying on an automated computer underwriting process, Sullivan said Countrywide eventually voluntarily brought underwriters back into the process starting in April 2008 out of concern about quality.
“No one came to the door saying, ‘We don’t like your product,'” Sullivan said.
A lawyer for Mairone, Marc Mukasey of Bracewell & Giuliani, meanwhile depicted his client as a “decent, hardworking” woman who came into Countrywide in 2007 as the “new girl” and was now being forced to face a “preposterous” lawsuit.
“Rebecca is fighting this case all by herself as the allegations are false,” Mukasey said.
The case is U.S. ex rel. O’Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422. (Reporting by Nate Raymond; Editing by Lisa Shumaker)
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