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DOJ Sues Bank of America For Lying About Sketchy Mortgage-Backed Securities

consumerist.com | August 7, 2013

By Chris Morran

Even though Bank of America execs appear to have avoided criminal prosecution for their part in the recent economic collapse, BofA continues to be slapped upside its head with civil suits for its bad behavior. The latest comes from the U.S. Dept. of Justice, which sued BofA and a number of its affiliates, alleging the defendants misled investors by telling them that mortgage-backed securities were A-OK, when in fact they were more toxic than a house full of lead paint and asbestos.

According to the suit filed in a U.S. District Court in BofA’s hometown of Charlotte, NC, Bank of America allegedly not only lied to investors about the relative riskiness of the mortgages backing $850 million in securities it sold off to investors, but that the bank also intentionally avoided performing due diligence on these loans and packed these securities with risky loans form third-party brokers — and then made false statements about all of this after the fact.

“Bank of America’s reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors,” said U.S. Attorney for the Western District of North Carolina Anne M. Tompkins. “Now, Bank of America will have to face the consequences of its actions. We have made a commitment to the American people to hold financial institutions accountable for practices that violated the law and wreaked havoc on the financial system, and my office takes that commitment very seriously. Our investigation into Bank of America’s mortgage and securitization practices continues.”

According to the complaint, BofA started selling a certain group of residential mortgage-backed security [RMBS] certificates to investors, including federally insured institutions, in early 2008. The bank “knowingly and willfully misled investors about the quality and safety of their investments in certain RMBS by making materially false and misleading statements and by omitting to disclose, among other things, important facts about the mortgages collateralizing the RMBS and Defendants’ failure to conduct adequate due diligence, in offering documents filed with the United States Securities and Exchange Commission,” claims the DOJ.

The suit alleges that 40% of the 1,191 mortgages in one pool failed to comply with the underwriting standards BofA had in place at the time, and that the bank was aware that the loans did not comply.

BofA also allegedly failed to perform due diligence on these loans when they were being packaged and securitized, a violation of the bank’s own policies. Had the bank inspected these loans, they would have seen glaring issues like overstated income, fake employment claims, inflated appraisals, wrong loan-to-value ratios, undisclosed debt, occupancy misrepresentation, mortgage fraud and other indicators that maybe these loans were as rock-solid as they had been made to be.

The third prong of the DOJ suit is that Bank of America allegedly concealed other important risks associated with these mortgages, like the fact that 70% of them had been originated by third-party brokers. Aside from the risk inherent in these so-called “wholesale mortgages,” the DOJ says that at the time these RMBS certificates were being issued, Bank of America had been told about — but failed to disclose — an alarming and significant decrease in the quality and performance of its wholesale mortgages.

As a result of taking BofA at its word that these securities were solid, investors took huge losses. The DOJ puts an estimate on the total loss by investors in the $100 million range.

A rep for BofA tells the Wall Street Journal that these loans were just fine and dandy when they were securitized, but that the collapse of the housing market is ultimately what hurt their value.

“These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” said the BofA rep, perhaps forgetting that his employer has already tallied up more than $40 billion in penalties, settlements and legal costs tied to the housing market collapse. “The loans in this pool performed better than loans with similar characteristics originated and securitized at the same time by other financial institutions.”

 

Back to August 2013 Archive

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