The US has filed a fraud case against Bank of America Corp, accusing it of causing taxpayers more than $1bn of losses by selling thousands of toxic mortgage loans to Fannie Mae and Freddie Mac.
Wednesday's case, originally brought by a whistleblower, is the justice department's first civil fraud case over mortgage loans sold to the big mortgage financiers, which were bailed out in 2008.
It also compounds the legal problems that Bank of America Chief Executive Brian Moynihan faces over the second-largest US bank's disastrous 2008 purchase of Countrywide Financial Corp, once the nation's largest mortgage lender.
According to a complaint filed in Manhattan federal court, Countrywide in 2007 invented a scheme known as the Hustle to speed up processing of residential home loans.
Operating under the motto "Loans Move Forward, Never Backward", mortgage executives tried to eliminate "toll gates" designed to ensure that loans were sound and not tainted by fraud, the government said.
This led to "defect rates" that approached 40 per cent, roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to "rebut" the problems being found, it added.
Defaults soared and "countless" foreclosures were the result in a scheme that existing during 2009, well after Bank of America had completed the Countrywide takeover in July 2008, the government added.
"The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," Preet Bharara, US attorney in Manhattan, said. "Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill."
Lawrence Grayson, a bank spokesman, said in response to the petition "Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters. The claim that we have failed to repurchase loans from Fannie Mae is simply false. 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."
In February, Bank of America agreed to a $1bn settlement of False Claims Act allegations over home loans submitted for insurance by the Federal Housing Administration, in a case from the US Attorney's office in Brooklyn, New York.
Wednesday's case seeks civil fines, as well as triple damages under the federal False Claims Act, which the government has used several times in recent years against Wall Street.
Since Moynihan's predecessor Kenneth Lewis paid $2.5bn for Countrywide, the Charlotte, North Carolina-based bank has lost nearly $40bn on mortgage litigation and investor demands to buy back soured loans, Credit Suisse said on October 5.
Some of these costs related to Merrill Lynch & Co, which Lewis bought at the beginning of 2009. Last month, Bank of
America agreed to pay $2.4bn to settle a lawsuit accusing it of misleading investors about that takeover.
According to court records, the latest case was originally filed under seal in February by Edward O'Donnell, a Pennsylvania resident and former executive vice president at Countrywide Home Loans who had worked there between 2003 and 2009.
In that complaint, O'Donnell said Countrywide and later Bank of America dismissed his "numerous" objections to the Hustle, and that he became "one of the lone voices" in his division pointing to escalating loan quality issues and defaults.
O'Donnell could not immediately be reached for comment, and his lawyer did not immediately respond to requests for comment.
Bank of America shares were down two cents to $9.34 in afternoon trading on Wednesday on the New York Stock Exchange. They closed at $23.87 on the day before the Countrywide takeover closed.
Federal regulators seized Fannie Mae and Freddie Mac on September 7, 2008, and put them into a conservatorship.
The mortgage financiers are now overseen by the Federal Housing Finance Agency, and have repaid only about one-fourth of the more than $188bn of taxpayer funds they have drawn down.
Fannie Mae alone has drawn down more than $116bn.
Wednesday's case was also brought under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which was enacted after that decade's savings-and-loan crisis.
It overlaps other cases that federal agencies have brought against Wall Street over the financial crisis, including the FHFA's 18 cases last year over Fannie Mae and Freddie Mac.
These cases covered losses on the sales of roughly $200bn of securities, including more than $57bn linked to Bank of America, Countrywide and Merrill.
Fannie Mae and Freddie Mac have in recent months stepped up their own efforts to force Bank of America and other lenders to buy back soured home loans.
Bharara's office has brought five civil fraud lawsuits under the False Claims Act over FHA-insured loans against other lenders.
In February, Citigroup Inc settled its case for $158.3m and Flagstar Bancorp Inc settled for $132.8m, while Deutsche Bank AG settled in May for $202.3m. Cases are also pending against Wells Fargo & Co and Allied Home Mortgage Corp, Bharara said.
Congressman Barney Frank, who chaired the House Financial Services Committee in 2008, said on Monday that Bank of America should probably be shielded from government cases over Merrill, which it bought in part at federal officials' urging.
He added, however, that he knew of no such urging to buy Countrywide.