By Patricia Hurtado
By Patricia Hurtado
NEW YORK - Bank of America Corp.’s Countrywide unit sold thousands of bad loans, defrauding Fannie Mae and Freddie Mac out of more than $1 billion in mortgages, prosecutors said at the start of a federal trial.
Countrywide engaged in the fraud to boost profits, earning at least $165 million as a result, Assistant U.S. Attorney Pierre Armand told jurors yesterday in opening statements in Manhattan.
“They benched the underwriters,” Armand said. “They pushed the approvals, removed controls, they ignored red flags, they withheld facts. And when the defects began to show up in droves, they kept Fannie and Freddie in the dark and they continued to sell them lemon loans. And that is fraud.”
The U.S. sued Bank of America in October, joining a whistle-blower action filed by a former Countrywide executive, Edward O’Donnell. The U.S. claims 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 case is the first brought by the U.S. against a bank over defective mortgages to go to trial.
Brendan Sullivan, a lawyer for Countrywide, told the jury in his opening statement that while the U.S. claims the loans were faulty, the bank had actually created a process to speed up the approval process of prime loans after it shifted focus away from subprime loans. He said no one at Countrywide had made misrepresentations to Fannie Mae or Freddie Mac.
“No fraud,” he said. “Two words. That’s the heart and soul and body of the defense.”
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,” prosecutors in the office of Manhattan U.S. Attorney Preet Bharara have alleged in court papers.
Government-sponsored entities such as Fannie Mae and Freddie Mac purchased single-family mortgages from lenders. The U.S. alleges that in order to maintain high revenue despite a “cratering” market for subprime mortgages, a division of Countrywide initiated a loan program called “High Speed Swim Lane” or “HSSL” in August 2007.
The program was designed to reduce the number of days spent processing loans to between 10 days and 15 days from as many as 60 days. The U.S. alleges that the program also reduced effective oversight and eliminated underwriter review of riskier loans. As a result, the HSSL program “effectively guaranteed” that the loans sold to Fannie Mae and Freddie Mac were of lower quality than represented, the U.S. said.
Sullivan, the Countrywide lawyer, said Fannie Mae and Freddie Mac were “experienced” and knew what kinds of loans Countrywide produced. Fannie Mae and Freddie Mac “were born to buy mortgages” and weren’t victims, Sullivan said.
Sullivan said O’Donnell filed his whistle-blower suit as part of a “get-rich-quick scheme.”
O’Donnell decided to “go to the government and cash in and make some money under the whistle-blower program,” Sullivan said.
Under federal law, a whistle-blower is entitled to a percentage of the money recovered as part of the case if the U.S. intervenes.
U.S. District Judge Jed Rakoff, who is presiding over the case, yesterday granted a request by Charlotte, N.C.-based Bank of America and Countrywide to bar prosecutors from presenting trial evidence and claims that they “are responsible for causing the worldwide financial crisis in whole or in part.”
“Evidence or argument that attempts to link a particular defendant to the nation’s recent economic struggles, whether it be the government’s fiscal troubles or any of the multitude of negative effects of the mortgage crisis and recession, is unfairly prejudicial,” lawyers for Countrywide and Bank of America said in papers.
The companies said in their filing that the global crisis “was a once-in-a-generation, multifaceted event to which a substantial number of factors contributed.”
Rebecca Mairone, the chief operating officer of a Countrywide unit at the time, was also sued by the U.S. and is a defendant in the case. Her lawyer, Marc Mukasey, told jurors yesterday that she hadn’t engaged in any scheme to defraud the U.S., Fannie Mae or Freddie Mac.
“Bottom line is you will see there is no fraud,” Mukasey said. “The government is not going to be able to prove this case. Rebecca Mairone did not intend to defraud anyone. The government’s got it dead wrong.”
The defendants also asked the court to disallow evidence about the U.S. Treasury’s decision to provide funding to Bank of America as part of the government’s Troubled Asset Relief Program, saying it would prejudice them before the jury and isn’t relevant to the civil fraud case.
“Any argument about the defendants’ supposed role in the worldwide financial crisis and its devastating effects could serve no other purpose than prejudicing the jury against the defendants’ by arousing the jurors’ frustrations with the economy or large financial institutions,” Bank of America said.
The case is U.S. v. Countrywide Financial Corp., 1:12- cv-01422, U.S. District Court, Southern District of New York (Manhattan).