NEW YORK — The latest federal lawsuit over alleged mortgage fraud paints an unflattering picture of a doomed lender: Executives at Countrywide Financial urged workers to churn out loans, accepted fudged applications and tried to hide ballooning defaults.
The suit, filed Wednesday by the top federal prosecutor in Manhattan, also underscored how Bank of America's purchase of Countrywide in July 2008, just before the financial crisis, backfired severely.
The prosecutor, Preet Bharara, said he was seeking more than $1 billion, but the suit could ultimately recover much more in damages.
"This lawsuit should send another clear message that reckless lending practices will not be tolerated," Bharara said in a statement. He described Countrywide's practices as "spectacularly brazen in scope."
He also charged that Bank of America has resisted buying back soured mortgages from Fannie Mae and Freddie Mac, which bought loans from Countrywide.
Bank of America spokesman Lawrence Grayson said the bank "has stepped up and acted responsibly to resolve legacy mortgage matters." He called the allegation that the bank has failed to buy back loans "simply false."
"At some point," Grayson said, "Bank of America can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."
Countrywide was a giant in mortgage lending, but was also known for approving exotic, even risky, loans. By 2007, as the market for subprime mortgages collapsed, Countrywide was anxious for revenue.
The lawsuit alleged that the company loosened its standards for making loans while telling Fannie Mae and Freddie Mac, which were buying loans from Countrywide, that standards were getting tighter.
Fannie and Freddie, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses.
To churn out more mortgage loans, Bharara said, Countrywide introduced a program called the "Hustle," shorthand for "High-Speed Swim Lane." It operated under the motto, "Loans Move Forward, Never Backward."
The program eliminated checks meant to ensure that mortgages were being made to borrowers who could afford them, according to the lawsuit.
For example, loan processors no longer had to complete worksheets that helped them assess whether income levels that borrowers entered on their loan applications were reasonable.
If processors entered a borrower's information into a computerized underwriting program and the program raised flags, employees had incentives to change the numbers, the suit said.
It also said that bonuses were awarded based solely on the number of loans that an employee could generate, not on their quality.
The process led to "widespread falsification" of mortgage data, Bharara charged. And when Countrywide executives became aware of the dangerously high number of borrowers defaulting, it hid the problem, according to the lawsuit.
In early 2008, for example, Countrywide offered bonuses for employees who could "rebut" the high rate of defaults. The standards were low, according to the lawsuit: If a review found that the income a borrower listed on his application seemed unreasonable, an employee could rebut the finding "simply by arguing that the stated income was reasonable."
The lawsuit gives seven examples of mortgages made for homes in California, Alabama, Florida and Georgia in which the borrowers' income and other qualifications were falsified.
For example, one loan application, for a home in Miami, said that the borrower was an airline sales representative earning $15,500 per month, when the borrower worked for a temp agency and earned $2,666 per month. The borrower defaulted within seven months, the suit said.
A loan application for a home in Birmingham, Ala., failed to disclose $81,000 in debt that the borrower was carrying. That borrower defaulted within a year, the suit said.
The lawsuit accused Countrywide, and later Bank of America, of selling thousands of Hustle loans to Fannie and Freddie. The lawsuit says that that the Hustle program continued through 2009.
According to the lawsuit, Fannie and Freddie don't review loans before they purchased them. Instead, they relied on banks' statements that the loans met certain qualifications.
Bharara said the lawsuit was the first civil fraud suit brought by the Justice Department concerning loans later sold to Fannie and Freddie. When Fannie and Freddie collapsed, investors were wiped out.
Taxpayers have spent $170 billion to keep Fannie and Freddie afloat, and it could cost $260 billion more to support the companies through 2014 after subtracting dividend payments to taxpayers, according to the government.
The lawsuit says that Fannie and Freddie suffered $1 billion in losses because they had to pay for Countrywide's defaulted loans. The lawsuit also complains that Bank of America is refusing to buy back mortgages "even where the loans admittedly contained material defects or even fraudulent misrepresentations."
Bank of America's purchase of Countrywide originally earned it plaudits from lawmakers because Bank of America was viewed as stepping in to eliminate a bad actor from the mortgage market.
But the purchase, instead of padding Bank of America's mortgage business, has drawn a drumbeat of regulatory fines, lawsuits and losses.
Bank of America reported last week that while it is issuing more mortgages — $21 billion worth last quarter, up 18 percent from a year earlier — its mortgage unit is still losing money as the bank works through crisis-era problems.
For at least two years, Bank of America and other banks have been sifting through so-called repurchase demands from Fannie, Freddie and other investors who bought its mortgages. The repurchase demands contend that the bank should buy back mortgages that have since gone bad.
Bank of America has bought back mortgages from investors but has also said it's not going to honor demands unless they're valid, and won't buy back loans that went bad simply because of the bad economy.
In 2010, Countrywide's former CEO, Angelo Mozilo, agreed to pay $67.5 million to settle the Securities and Exchange Commission's accusations that he had misled investors and engaged in insider trading.
He was also permanently barred from serving as an officer or director of a public company. In 2011, federal prosecutors shelved a criminal investigation of Mozilo, saying his actions did not amount to criminal wrongdoing.
Bank of America had planned to put Countrywide's president, David Sambol, in charge of the mortgage unit, but reversed course before it bought Countrywide. At the time, Bank of America said it wanted one of its own to run the unit because of how much was at stake.
In the past year and a half, Bharara's office has settled lawsuits against CitiMortgage, Flagstar Bank and Deutsche Bank over mortgages. Its lawsuits against Wells Fargo and Allied Home Mortgage are pending.