US govt sues Bank of America over mortgage securities ‘fraud’

Robb-Graeme-Prudential-2013

The US government is suing Bank of America in two lawsuits, alleging that the group put loans it suspected to be “toxic waste” in $850m (£553m) of mortgage-backed securities.

The Securities and Exchange Commission and the Justice Department have filed parallel suits in North Carolina over the alleged fraud relating to a MBS issued in 2008.

In the SEC filing, the regulator claims that Bank of America failed to tell investors that more than 70 per cent of the mortgages backing its BOAMS 2008-A offering originated through the bank’s “wholesale” channel of mortgage brokers who were unaffiliated with its entities.

It also alleges that Bank of America knew that such third-party loans, which were described by Bank of America’s then-CEO Ken Lewis as “toxic waste”, presented “vastly greater” risks of severe delinquencies, early defaults, underwriting defects and prepayment.

However, it claims that the bank only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors, despite the risks directly impacting the returns to RMBS investors.

Co-director of the SEC’s division of enforcement George Canellos says: “In its own words, Bank of America ‘shifted the risk’ of loss from its own books to unsuspecting investors, and then ignored its responsibility to make a full and accurate disclosure to all investors equally.

“This is one in a long line of RMBS-related enforcement actions brought by the SEC to hold entities accountable for wrongdoing connected to the crisis.”

BOAMS 2008-A, which was worth around $850m when it was issued in January 2008, contained ‘prime’ loans rather than subprime mortgages, unlike most other MBS that have been subject to litigation since the crisis. The lawsuit details emails between employees debating whether the packaged loans were suitable for the product.

The MBS collapsed during the financial crisis as the quality of the loans packaged within it collapsed. This led to investor losses of more than $100m, the filing says.

However, Bank of America says that the fact that the MBS failed was not its fault, arguing that the investment contained prime mortgages and was sold to sophisticated investors .

“The loans in this pool performed better than loans with similar characteristics originated and securitized at the same time by other financial institutions,” the bank says in a statement.

“We are not responsible for the housing market collapse that caused mortgage loans to default at unprecedented rates and these securities to lose value as a result.”