The top federal prosecutor in Manhattan sued Bank of America for more than $1 billion on Wednesday for mortgage fraud against Fannie Mae and Freddie Mac during the years around the U.S. financial crisis.
U.S. Attorney Preet Bharara said Countrywide Financial, which was later bought by Bank of America, churned out mortgage loans from 2007 to 2009 without making sure that borrowers could afford them.
“The fraudulent conduct alleged in today’s [Wednesday’s] complaint was spectacularly brazen in scope,” Mr. Bharara said in a statement. He said the suit was partly to recover money that Fannie and Freddie lost from defaulted loans.
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Bank of America had no immediate comment.
Fannie and Freddie buy mortgage loans from banks, package them into securities and sell them to investors. The idea is to free up banks to make more loans. If a loan defaults, Fannie and Freddie guarantee payments to the investors.
Countrywide sold the loans to Fannie Mae and Freddie Mac, which were left to pay for the loans when they defaulted, according to the lawsuit. Fannie and Freddie were effectively nationalised in 2008.
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The lawsuit alleged that Countrywide traded quantity for quality and eliminated underwriters, even from mortgage loans for which borrowers did not have to get their income verified.
The suit said Countrywide executives were aware of the dangerous path they were treading. Instead of notifying Fannie and Freddie, Countrywide set about to conceal the quality of the loans it was selling them.