U.S. suit slams Countrywide, implicates Bank of America

NEW YORK -- The latest federal lawsuit over alleged mortgage fraud paints an unflattering picture of a doomed lender: Executives at Countrywide Financial urged workers to churn out loans, accepted fudged applications and tried to hide ballooning defaults.

The suit, filed Wednesday by the top federal prosecutor in Manhattan, also underscored how Bank of America's purchase of Countrywide in July 2008, just before the financial crisis, backfired severely.

The prosecutor, Preet Bharara, said he was seeking more than $1 billion, but the suit ultimately could recover much more in damages.

"This lawsuit should send another clear message that reckless lending practices will not be tolerated," Bharara said in a statement. He described Countrywide's practices as "spectacularly brazen in scope."

He also charged that Bank of America has resisted buying back soured mortgages from Fannie Mae and Freddie Mac, which bought loans from Countrywide.

Bank of America spokesman Lawrence Grayson said the bank "has stepped up and acted responsibly to resolve legacy mortgage matters." He called the allegation that the bank has failed to buy back loans "simply false."

"At some point," Grayson said, "Bank of America can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."

Countrywide was a giant in mortgage lending, but also was known for approving exotic, even risky, loans. By 2007, as the market for subprime mortgages collapsed, Countrywide was anxious for revenue.

The lawsuit alleged that the company loosened its standards for making loans while telling Fannie Mae and Freddie Mac, which were buying loans from Countrywide, that standards were getting tighter.

Fannie and Freddie, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses.

To churn out more mortgage loans, Bharara said, Countrywide introduced a program called the "Hustle," shorthand for "High-Speed Swim Lane." It operated under the motto, "Loans Move Forward, Never Backward."

The program eliminated checks meant to ensure that mortgages were being made to borrowers who could afford them, according to the lawsuit.

For example, loan processors no longer had to complete worksheets that helped assess whether income levels that borrowers entered on their loan applications were reasonable.

If processors entered a borrower's information into a computerized underwriting program and the program raised flags, employees had incentives to change the numbers, the suit said.

The process led to "widespread falsification" of mortgage data, Bharara charged.

The lawsuit accused Countrywide, and later Bank of America, of selling thousands of Hustle loans to Fannie and Freddie. The lawsuit says the Hustle program continued through 2009.

According to the lawsuit, Fannie and Freddie don't review loans before they purchased them. Instead, they relied on banks' statements that the loans met certain qualifications.

Bharara said the lawsuit was the first civil fraud suit brought by the Justice Department concerning loans later sold to Fannie and Freddie.

When Fannie and Freddie collapsed, investors were wiped out.

Taxpayers have spent $170 billion to keep Fannie and Freddie afloat, and it could cost $260 billion more to support the companies through 2014 after subtracting dividend payments to taxpayers, according to the government.