Long after the disco era, Bank of America Corp. (NYSE: BAC) was still singing "Do the Hustle."
So the federal government alleges.
U.S. regulators maintain BofA, the second biggest U.S. bank by assets, and its partner in crime, its Countrywide Financial Corp. unit, burdened taxpayers with hordes of losses by misrepresenting the quality of home loans they sold to Fannie Mae and Freddie Mac.
In federal court in Manhattan on Wednesday, the Justice Department slapped BofA with the suit, seeking damages of at least $1 billion claiming mortgage fraud.
Filed under the False Claims Act, the lawsuit also threatens to impose steep fines and could provide for three times the damages suffered by Fannie and Freddie, a penalty that could swell to more than $3 billion.
The complaint claims that in 2007, ailing Countrywide, saddled with revenue shortfalls as the subprime mortgage markets came tumbling down, did away with background checks on loan quality in a process streamlining effort dubbed "the Hustle," short for the acronym HSSL-High Speed Swim Lane. According to Countrywide documents, the program's mantra was "move forward, never backward."
Meanwhile, the bank gave surety to Fannie and Freddie that it was strengthening its underwriting guidelines.
The move by the U.S. government is seen as a means to help it foot the hefty costs linked to the 2008 bailout of Fannie and Freddie.
It also opens the floodgates for similar suits against the struggling banking industry, already reeling with mounds of legal issues and mountains of pricy suits.
The Wall Street Journal reports the nation's seven biggest banks have recognized or set aside $76 billion in mortgage related costs since 2008, according to data from Credit Suisse.
"They never know who's going to be coming after them next. There's no central traffic cop," Dan Hurson, a former federal prosecutor who now defends securities cases told The New York Times.
Just two weeks ago, the Justice Department went after Wells Fargo & Co. (NYSE: WFC), the biggest U.S. mortgage company, claiming the bank irresponsibly issued mortgages and left the Federal Housing Administration on the hook to pick up the costs. Wells refutes the allegations.
Bank of America's (NYSE: BAC) Rebuttal
No doubt, Bank of America must feel like is has become the sickly poster child of the financial crisis.
In a statement, the Charlotte, N.C.-based bank said it "has stepped up and acted responsibly to resolve legacy mortgage matters. At some point, Bank of America can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."
"This is about the tenth government case against BofA for mortgage fraud, after a $2.4 billion settlement," explained Money Morning Global Investing Strategist Martin Hutchinson. "It relates only to alleged frauds against Fannie and Freddie, themselves fraudulent institutions that would not be allowed to exist in a real market. There's such a thing as the prohibition of double jeopardy!"
"These cases just rob innocent BofA shareholders and transfer wealth to government bureaucrats; they do nothing to attack the executives who did the damage," continued Hutchinson. "This kind of post facto harassment is why the US has such a lousy growth rate; we would be 40% richer if over-regulation and harassment had not been allowed to grow like weeds since 1973!"
What to Expect for BAC
Under the False Claims Act, the government is permitted to go after parties that submit false records to either receive payment from a government agency or to avoid making payment to a federal agency.
While the U.S. government has thrown both Fannie and Freddie a lifeline with piles of bailout dollars, the mortgage behemoths are not federal agencies or wholly owned government companies, even though they still owe the government billions.
That could be an obstacle for government lawyers because they, along with Freddie and Fannie lawyers, have argued in past cases that Freddie and Fannie are not federal entities.
Adam Feinberg, head of litigation at Miller & Chevalier Chartered told The Journal, "This is a real stretch. The biggest problem is that Fannie and Freddie are not federal agencies and do no receive federal dollars in the normal sense of the word."
The fresh suit comes five years after the mortgage bubble and subsequent burst, highlighting how the after-effects continue to haunt banks.
Shares of BAC fell about 3.4% last week to close Friday at $9.12.
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