A man takes a lump of dog feces, puts it in a box, and sells it to you as organic baking chocolate. That would constitute fraud.
Imagine that same scenario, except the product is subprime mortgages labeled as "investment-quality" mortgages. Banks eliminate all quality control and mass-process thousands of defective mortgages, which are then bundled and sold to Fannie and Freddie Mac, which are owned by the government (and by extension, the taxpayers). That also is allegedly fraud, at least according to a lawsuit filed by the Department of Justice.
The defendant in this case is Countrywide, and later after its acquisition, Bank of America. The government alleges that the defendants, from 2007 to 2009, ran a program called “Hustle,” “HHSL,” or “High-Speed Swim Lane,” which eliminated nearly all internal quality controls and processed mortgages that they knew, or should have known, were defective, reports the DOJ. They then sold those to the Feds until everyone woke up to the fact that these were actually “crap-in-a-box”, as our economy tanked. The process was implemented while the default rate on mortgages was already increasing nationwide, which presumably accelerated the mortgage crisis.
To put it simply, the pirate ship was sinking. Instead of fleeing, the pirates decided to commit one last heist. Now, it could cost them billions.
When a person is defrauded, and successfully sues, they can often receive treble (triple) damages as a means of punishing the other party. That same rule also applies to the big boys. Under the applicable federal laws (FIRREA and the False Claims Act, for instance), civil penalties and treble damages are also an option. Should the DOJ prove their case, BofA could end up paying the Fannie and Freddie Mac three times the amount that was lost, plus additional penalties. The losses are estimated at over $1 billion.
It’s not just Bank of America that caused the crisis. The Civil Frauds Unit has also brought cases againt five other lenders, including CitiMortgage, Flagstar Bank, Deutsche Bank and MortgageIt, Wells Fargo, and Allied Home Mortgage Group. Three of the five cases have settled, though the amounts are all in the hundreds of millions instead of the billions sought from BofA.
- Consult a New York Personal Injury Law Attorney (FindLaw)
- U.S. Accuses Bank of America of a ‘Brazen’ Mortgage Fraud (New York Times Dealbook)
- Banks Reduce $25 Billion Settlement by Forgiving Dead Debt (FindLaw’s New York Personal Injury Law Blog)
- Fraud (FindLaw’s Learn About the Law)