A federal prosecutor from the Department of Justice has filed a one BILLION dollar civil lawsuit against Countywide/BoA for a massive scheme to defraud investors, notably Freddie and Fannie, into purchasing loans that were practically guaranteed to quickly go bad. This lawsuit is based on the courage of a former six year Countrywide Vice President, Edward J. O’Donnell. Notably, while Countrywide executives who heavily participated in the fraudulent conduct are named in the lawsuit, none of these, or, for that matter, are any individuals held accountable for this conduct. Remember Countrywide’s CEO, Anthony Mozillo who made $521 million from 2000-2008 plus $140million when he sold his Countrywide stock and about whom Forbes magazine asked in 2010, “Why isn’t Mozillo in jail?” here. He was fined by the SEC, paid a tiny percentage of his ill-gotten gains and has moved on, leaving a horrific financial crisis and foreclosure fraud crisis in his wake.The lawsuit was filed today, is 46 pages long and can be found here.
The claims are familiar but include details about the creatively named Countrywide loan approval process called “Hustle” or “HSSL”, for high-speed-swim-lane. This process was concocted in late 2006 when investor appetite for subprime loans was drying up due to the early defaults of many of the subprime loans backing mortgage investment vehicles sold to retirement fund managers and other investors. The Hustle eliminated any and all obstacles to loan approval while compensating Countrywide employees based on number of loans. Gone were the quality control measures, loan approval staff, and incentives to deny bad loans. When quality control staff actually did raise some alarms over some of the loans, a remarkable feat given the effort to cover up the horrible loan quality, another group was given a bonus to override those concerns. The Hustle process started in 2007, $408 billion in loans approved that year alone, and ran full swing until just after the BoA bailout, ending in November 2008. There was a single minded purpose for extending these fraudulent loans, to sell them to Fannie Mae and Freddie Mac, which were essentially supporting Countrywide by 2007 until it keeled under from the weight of it’s own fraud and was absorbed by Bank of America in January 2008.
Countrywide wasn’t the only hustler out there. In an earlier case filed by the Department of Justice (DOJ) against Deutsche Bank and originator MortgageIt, the same process was detailed. The same willful disregard of fraud warnings were part of the DOJ’s claims. For example, pages four and five of that lawsuit tells of a closet full of stacks of unopened, unread loan process compliance audits that warned MortgageIt of massive fraud in their loan approval process. That lawsuit was settled for $202 million in May of 2012.
These lawsuits clarify the internal control frauds that existed at the mortgage loan originator outfits. The employees were instructed and incentivized to inflate the value of the homes, the quality of the borrowers’ credit profile, the borrowers’ income, and any other criteria in order that a square peg loan could fit into the round hole of Freddie and Fannie loan requirements.
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