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Sep
2013
30

BoA Mortgage Crisis Trial Prosecutors: “The Promise of Quality Was Largely a Joke”

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In New York, the first trial against a major bank over the mortgage practices that led up to the 2008 mortgage crisis has been brought against Bank of America. Lawyers claim BoA committed “massive fraud” when it sold loans it promised to be of investment quality to Fannie Mae and Freddie Mac.  At the center of the trial is the bank’s Countrywide unit which, according to the legal team, knowingly sold deficient home loans to the government organizations which underwrite mortgages using a process called “hustle.”  

The lawsuit claims that this fraud is responsible for the losses taken on by Freddie Mac and Fannie Mae which led to thousands of subprime mortgages. These mortgages later defaulted and resulted in the organizations being taken over by the government.  Pierre Armand, a lawyer in the civil division of the U.S. Attorney’s office, waxed certain in the trial’s opening statements: “What documents and witnesses will show is that the promise of quality was largely a joke.”

The Countrywide Financial Corp., acquired by Bank of America in 2008, has become the poster child of the 2008 mortgage crisis and its “hustle” program is a prime example of how an unregulated Wall Street can have an adverse long-term effect on the economy.  Hustle is a take on the acronym HSSL, or High Speed Swim Lane.

Brendan Sullivan, a partner at the law firm Williams & Connolly LLP, is defending Bank of America. He began his opening statements by countering claims of fraud. He also attempted to change the connotation of “hustle,” insisting it was being used in a positive way, according to the Wall Street Journal:

Mr. Sullivan said Countrywide created the Hustle program to fast-track prime loans to the mortgage lender’s best customers. In 2007, Countrywide was attempting to transition away from making loans to subprime borrowers, or those deemed the riskiest. It created an automated process that could more quickly approve loans for highly qualified borrowers. Mr. Sullivan argued that as sophisticated mortgage-finance companies, Fannie Mae and Freddie Mac were well aware of Countrywide’s automated procedures.

“People thought it was a great idea,” he told the jury. “Don’t let these good prime customers be stuck with all the others.”

Mr. Sullivan also tried to defend the name of the program, saying to hustle doesn’t have a negative connotation. “It’s not a bad word,” he said. “A coach says in Little League, get out there, Johnny, and hustle.”

The government’s case is centered around former Countrywide Financial Corp executive Edward O’Donnell’s whistleblowing.  He tells a different tale about HSSL and how it was being used by his company:

Countrywide pushed to streamline its loan origination business through the program, eliminating loan quality checkpoints and paying employees based only on the volume of loans they produced, according to the lawsuit.

The result was “rampant instances of fraud and other serious loan defects,” including in the mortgages sold to Fannie and Freddie, despite assurances Countrywide had tightened underwriting guidelines, the Justice Department said.

While BoA tries to give “hustle” a good name, the government’s case shows how the program was used to overlook glaring errors on applications that received little attention or oversight due to the fast track program.

The government’s lawyer, Mr. Armand, gave one example of a loan that was approved by Countrywide’s Hustle team in which a doorman in Fort Lauderdale, Fla., claimed on his application to be making $13,000 a month. “Basic underwriting by looking at salary.com would have shown a doorman in that area wouldn’t have been making more than $6,000 a month,” Mr. Armand said.

He said the borrower in that case was in fact making $5,000 a month.

Armand added,

“Hustle was not about quality,” Armand said. “It was about speed. It was about volume. It was about profits.”

In a perfect example of how nothing has changed in the culture of Wall Street following the economic meltdown, Rebecca Mairone, who oversaw the HSSL process while acting as COO of Countrywide’s Full Spectrum Lending Division, remained with Bank of America until 2012 when she left to become a managing director at JP Morgan Chase.  

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