The Justice Department sued Bank of America for a whopping $1 billion this week for allegedly selling toxic home loans to Fannie Mae and Freddie Mac, the government-controlled mortgage agencies. "The fraudulent conduct alleged in yesterday's complaint was spectacularly brazen," said U.S. Attorney Preet Bharara. Under a loan program known as "the hustle," from 2007 to 2009 Bank of America and its subsidiary Countrywide "made disastrously bad loans and stuck taxpayers with the bill," Bharara said. The case is one of the largest to be brought against a major bank for actions related to the financial crisis. Here, a guide to the suit:
What is Bank of America accused of exactly?
The government says Countrywide Financial, a mortgage lender purchased by Bank of America in 2008, "rubber-stamped mortgage loans to risky borrowers and passed them on to Fannie Mae and Freddie Mac," says Ben Protess at The New York Times. The practice, which was allegedly continued by Bank of America after the acquisition, ended up glutting the two mortgage giants with toxic loans that helped push them toward the brink of bankruptcy in the midst of the financial crisis. The feds were forced to step in, and so far have spent a staggering $190 billion keeping Fannie and Freddie afloat.
Why were Fannie Mae and Freddie Mac accepting the loans?
Fannie Mae and Freddie Mac play a central role in the housing market, buying up top-rated mortgages from private banks. In theory, the arrangement frees up banks to make more loans at cheaper prices, which encourages home ownership and helps the economy. In practice, it spread toxic loans throughout the financial system, because Countrywide and Bank of America allegedly hid the fact that the loans were incredibly prone to default.
What does Bank of America say?
The bank says loans soured because of the tanking economy, not fraud. "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," said spokesman Lawrence Grayson. Whether Bank of America is at fault or not, "the branding of an internal loan approval process as 'hustle' perfectly illustrates the gleeful sales culture" that led to the housing bubble, says Philip van Doorn at The Street. And the loan-approval process, according to Bharara, was barren of oversight: The company "systematically removed every check" that may have sent up red flags.
What about other big banks?
Regulators want other banks like Wells Fargo, Citigroup, and JPMorgan Chase to buy back the poisonous mortgages they sold to Fannie Mae and Freddie Mac. In addition, Bharara sued Wells Fargo earlier in October for similarly dubious practices.