The U.S. government charged Tuesday that Bank of America Corp.
BAC -1.09%
defrauded investors when it sold $850 million worth of mortgage-backed
securities, a new hurdle in the bank's quest to persuade investors its
legal troubles are in the past.
The Department of Justice and
Securities and Exchange Commission filed parallel civil actions in
federal court in North Carolina alleging that the second-largest U.S.
bank by assets understated the risks associated with mortgage-backed
securities in 2008.
A Bank of America spokesman said the securities in the case soured because the housing market collapsed, which wasn't the fault of the bank.
Tuesday's complaints, however, show that regulators and government investigators still are working through a backlog of cases focused on banks' actions during the housing downturn and financial crisis.
In another civil enforcement action Tuesday stemming from mortgage-bond deals, UBS AG UBSN.VX -0.69% agreed to pay $49.8 million to settle SEC allegations related to a collateralized debt obligation it developed in 2007. It neither admitted nor denied the regulator's findings.
Unlike UBS, BofA is fighting Tuesday's civil charges.
"These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that," the spokesman said.
The case involves more than 1,000 prime
"jumbo" loans packaged into securities and sold in January and February
2008 to five investors, including the Federal Home Loan Bank of San
Francisco and Wachovia Bank. Most of the securities were rated Triple-A.
Wells Fargo
WFC -0.70%
& Co., which acquired Wachovia, and the San Francisco FHLB declined to comment.
The Justice Department complaint says that the number of defaulted and delinquent loans is "abnormally high" and "cannot be solely explained by the downturn in the real estate market over the last few years."
The complaints are among the first instances of a lawsuit over nongovernment-backed jumbo loans, or home loans that in 2007 exceeded $417,000 for a single-unit dwelling.
Previous legal battles over soured mortgage-backed securities typically involved loans by banks to subprime borrowers, many of whom were too extended to pay back their debts when the housing market turned lower.
Bank of America has been plagued by legal troubles since it purchased mortgage lender Countrywide Financial Corp. and brokerage firm Merrill Lynch & Co. during the financial crisis.
In Tuesday's complaint, the Justice Department alleges that the bank didn't comply with its own internal underwriting standards when it sold the loans to investors. In total, more than 40% of the 1,191 mortgages didn't comply with the bank's standards, the government said.
The Justice Department also alleged that the
bank concealed important risks associated with the mortgages backing the
securities. For example, the bank didn't tell investors that 22% of the
homeowners were self-employed and that 70% of those didn't have their
income validated by the bank, the complaint alleges.
The bank also didn't tell investors that 70% of the loans were originated by third-party mortgage brokers, the Justice Department said, a fact it alleges backs its assertion that the bank concealed risk. A bank spokesman said loans originated by third parties perform at least as well as loans originated by the bank.
The complaint says the bank created a high-pressure environment where employees were pushed to approve an abundance of loans without any care for quality.
One employee told the government that she was told to "keep her opinions to herself" when processing loan applications. The government also alleged that the bank decided to skip loan-level due diligence on one securitization to save roughly $15,000 in expenses.
The charges could open a new chapter for Bank of America as it struggles to put its legal troubles behind it.
Bank of America, run since 2010 by Chief Executive Brian Moynihan, has set aside more than $42 billion in litigation expenses, payouts and reserves, the company says.
The government said it is seeking the maximum amount in damages allowed under the law but didn't specify a figure. The SEC complaint puts investor's losses at $70 million and said it anticipates an additional $50 million in future losses.
In a statement, Attorney General Eric Holder called the suit "the latest step forward in the Justice Department's ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct."
CLSA Americas analyst Mike Mayo said he doesn't think the bank's potential losses in this case are significant when compared to other outstanding cases. For example, Bank of America is waiting for approval from a New York state judge of an $8.5 billion settlement with investors over soured mortgage-backed securities.
Tuesday's announcement follows a disclosure last week from the Charlotte, N.C., bank that the Justice Department, SEC and New York Attorney General's office were moving ahead with potential mortgage-related charges.
At UBS, the deal was the latest in a series of SEC suits involving collateralized debt obligations, securities linked to pools of risky mortgages and other loans, sold in slices to investors.
The SEC alleged UBS improperly retained $23.6 million of upfront cash payments it received when creating a CDO called ACA ABS 2007-02. The Swiss bank, which didn't admit or deny wrongdoing, said it was "pleased to put this investigation behind" it. In a statement, UBS added that it believed the deal "marks the conclusion of all SEC investigations" related to its CDOs backed by residential mortgage-backed securities.
SOURCE : http://online.wsj.com/article/SB10001424127887323968704578652302136846358.html
A Bank of America spokesman said the securities in the case soured because the housing market collapsed, which wasn't the fault of the bank.
Tuesday's complaints, however, show that regulators and government investigators still are working through a backlog of cases focused on banks' actions during the housing downturn and financial crisis.
In another civil enforcement action Tuesday stemming from mortgage-bond deals, UBS AG UBSN.VX -0.69% agreed to pay $49.8 million to settle SEC allegations related to a collateralized debt obligation it developed in 2007. It neither admitted nor denied the regulator's findings.
Unlike UBS, BofA is fighting Tuesday's civil charges.
"These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that," the spokesman said.
Associated Press
BofA says securities in the case soured in step with the housing market.
The Justice Department complaint says that the number of defaulted and delinquent loans is "abnormally high" and "cannot be solely explained by the downturn in the real estate market over the last few years."
The complaints are among the first instances of a lawsuit over nongovernment-backed jumbo loans, or home loans that in 2007 exceeded $417,000 for a single-unit dwelling.
Previous legal battles over soured mortgage-backed securities typically involved loans by banks to subprime borrowers, many of whom were too extended to pay back their debts when the housing market turned lower.
Bank of America has been plagued by legal troubles since it purchased mortgage lender Countrywide Financial Corp. and brokerage firm Merrill Lynch & Co. during the financial crisis.
In Tuesday's complaint, the Justice Department alleges that the bank didn't comply with its own internal underwriting standards when it sold the loans to investors. In total, more than 40% of the 1,191 mortgages didn't comply with the bank's standards, the government said.
Previously
- BofA Discloses Slew of Regulator Probes (Aug. 1, 2013)
- Read the DOJ Complaint
The bank also didn't tell investors that 70% of the loans were originated by third-party mortgage brokers, the Justice Department said, a fact it alleges backs its assertion that the bank concealed risk. A bank spokesman said loans originated by third parties perform at least as well as loans originated by the bank.
The complaint says the bank created a high-pressure environment where employees were pushed to approve an abundance of loans without any care for quality.
One employee told the government that she was told to "keep her opinions to herself" when processing loan applications. The government also alleged that the bank decided to skip loan-level due diligence on one securitization to save roughly $15,000 in expenses.
The charges could open a new chapter for Bank of America as it struggles to put its legal troubles behind it.
Bank of America, run since 2010 by Chief Executive Brian Moynihan, has set aside more than $42 billion in litigation expenses, payouts and reserves, the company says.
The government said it is seeking the maximum amount in damages allowed under the law but didn't specify a figure. The SEC complaint puts investor's losses at $70 million and said it anticipates an additional $50 million in future losses.
In a statement, Attorney General Eric Holder called the suit "the latest step forward in the Justice Department's ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct."
CLSA Americas analyst Mike Mayo said he doesn't think the bank's potential losses in this case are significant when compared to other outstanding cases. For example, Bank of America is waiting for approval from a New York state judge of an $8.5 billion settlement with investors over soured mortgage-backed securities.
Tuesday's announcement follows a disclosure last week from the Charlotte, N.C., bank that the Justice Department, SEC and New York Attorney General's office were moving ahead with potential mortgage-related charges.
At UBS, the deal was the latest in a series of SEC suits involving collateralized debt obligations, securities linked to pools of risky mortgages and other loans, sold in slices to investors.
The SEC alleged UBS improperly retained $23.6 million of upfront cash payments it received when creating a CDO called ACA ABS 2007-02. The Swiss bank, which didn't admit or deny wrongdoing, said it was "pleased to put this investigation behind" it. In a statement, UBS added that it believed the deal "marks the conclusion of all SEC investigations" related to its CDOs backed by residential mortgage-backed securities.
SOURCE : http://online.wsj.com/article/SB10001424127887323968704578652302136846358.html
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