Countrywide legacy costs continue to haunt Bank of America

When I hear the name Countrywide I associate it with other companies such as Enron, Worldcom, and Arthur Andersen.   The legacy of Countrywide is infamous for the political favors it purchased in Congress with it’s Friends of Mozzila bribes and the allegedly fraudulent loans it underwrote and sold to investors.  Countywide did more than underwrite subprime loans to unqualified borrowers it also forged documents. So, when Countrywide was sinking, I was scratching my head when Bank of American decided to purchase Countrywide for $4 billion dollars.  Even back then Countrywide’s reputation was already dubious even if you weren’t a bank insider.  Five years later it might have cost Bank of America $40B dollars, or in a percentage calculation it’s negative 1,000% return.  And the costs will probably increase bad loans and lawsuits.

Bank of America Must Face Mortgage Fraud Trial: Judge

Bank of America Corp. must face a trial next month in a lawsuit alleging the bank’s Countrywide unit defrauded Fannie Mae and Freddie Mac  by selling them billions of dollars in bad mortgages, a federal judge ruled.

U.S. District Judge Jed Rakoff in Manhattan issued a ruling today rejecting the bank’s request to dismiss the case, putting it on track for a trial scheduled to begin Sept. 23.

“The court concludes that there remain genuine factual disputes that, on at least one or more of the government’s theories, precludes the granting of summary judgment to any defendant,” Rakoff said in a one-page order, saying he would file a full opinion at a later date.

The U.S. sued Bank of America in October, intervening in a whistle-blower action originally filed by a former Countrywide executive, Edward O’Donnell. The U.S. claimed Bank of America and Countrywide, which it acquired in 2008, sold thousands of defective loans from 2007 to 2009 to the home-mortgage finance companies.

The government alleged Countrywide engaged in a “host of irresponsible origination practices that prioritize funding speed and discourage scrutiny and quality into a singularly risky loan manufacturing process that pumped out large quantities of poor quality loans,” according to a memorandum filed in July.

“This program ended before our purchase of Countrywide, as the government acknowledges,” said Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America. “We believe there was no fraud.”

“We believe there was no fraud”, well what else do I expect them to say.  I think we need to review some the allegations.  It’s a long article so I pulled excerpts.  If fact, I thought Countywide was going to get away with it, but the lawsuit above was filed.  Apparently, the “banking clan” can’t pull all the strings.

Countrywide whistleblower reveals rampant mortgage fraud part of ‘everyday business’

…A team of investigators went to Boston to look into the complaints in person and were shocked by what they found. “Typically when you’re looking for fraud you’ve got to really look because one of the primary components of a fraud is concealment,” Foster said. “These people weren’t concealing it. They were concealing it from corporate, but every person who walked into those branches every day was a participant.”

“One process was to cut a signature off one document, paste it and make a photocopy so it looks like an original signature,” she continued. “A part and parcel of everyday business was to do anything it took to fund a loan.”

They had templates for fabricating documents, cases of Wite-Out for changing names and a method for gaming the automated underwriting system—plugging in income values until they got one that worked and allowed them to underwrite the loan. They’d keep a template bank statement from each bank, then plug in different borrowers’ names and an asset amount to prove that the borrower could make the payments on the loan.

The Department of Labor report that vindicated Foster described “multiple incidents of egregious fraud spread throughout the entire region, including loan document forgery and alteration, manipulation of borrower’s assets and income, manipulation of the company’s automated underwriting system, the destruction of valid client documents, and evidence that blank templates of bank statements from several different financial institutions were emailed back and forth among loan officers in various branches for use in forging proof of borrower income and assets.”…

…Yet years later, we still find ourselves debating who’s at fault for the mortgage crisis, with all too many people still attempting to place the blame on the backs of borrowers who bought houses they couldn’t afford. Foster doesn’t buy that, not after what she saw. Without borrowers knowing, she noted, their documents were changed, their signatures cut and pasted onto things they’d never seen, their incomes magically multiplied. “They’d set them up with those teaser rates they could afford, put in the income they needed,” she said. “They were so confident that they could refinance, they could sell it, because property values were going up. That’s how some of the loan officers rationalized it. Another part of fraud is rationalizing what you’re doing.”

The motivation for churning those loans out was the secondary market, where the loans were repackaged and sold to investors—and Foster said the fraudulent loans hit the market just like any other. One of her investigators, in June 2008, received an email from the secondary markets division asking him to remove the flag they’d placed on certain loans so that he could pool them for sale. “I called him up and said, ‘Do you understand what this flag is?’ He was just focused on needing these 27 loans for this sale.”…

These allegations are not just errors or untrained people making mistakes.  It’s loan fraud and it’s defrauding the investors of these loans Countrywide was selling to.  There is term I’ve heard in a few years: paper mill.  Countrywide was king of the paper mills.  Instead of people robbing banks the banks were robbing people, think about the concept for a moment.  Was ever a bank robber that stole hundreds of billions of dollars.  And this one just one branch, how many different locations this was committed.

I think good that Countrywide is finally being brought on charges.  In fact I notice JP Morgan is being investigated too and it’s plan to finally go after some of these mortgage brokerages and banks.  As a commenter stated on the blog this week the people that committed these acts have probably already left the companies and probably and already been compensated.  These investigations should have conducted years ago when there was better chance to get the people that perpetrated the crimes.

These faulty loans were sold to Fannie Mae and Freddie Mac, so when they failed the tax payers had to bailout the them out.   It will be impossible to recoup the all damages because it would put Bank of America out of business, but in the past I fell the banks got away with very little damages.