Subprime Mortgage Fraud Allegations Hit Bank of America

The disgraceful actions of so many banks and financial institutions in the subprime mortgage mess that ushered in the financial crisis of 2007-2008 finally hit Bank of America. On August 6, 2013, the Department of Justice and Securities and Exchange Commission sued BofA for alleged securities fraud. The DOJ and SEC accused the bank of defrauding investors when it sold $850 million mortgaged-backed securities in 2008 without informing them of the risks of default.

The sale of subprime mortgages that were grouped as securitized investments (i.e., secured by the home) and that triggered the financial meltdown was brought on by excessive risk taking. Some have blamed moral hazard as a major contributing factor. Moral hazard occurs where one party is responsible for the interests of another, but has an incentive to put her own interests first. Research by Atif Mian and Amir Sufi of the University of Chicago’s business school provides hard evidence that securitization of mortgages fostered moral hazard among mortgage originators, which led them to issue loans to uncreditworthy borrowers. They were motivated to do so by moral hazard effects, in that the securitized assets were sold off to unsuspecting investors and so the risk of default transferred to these parties, not the originating banks.

Bank of America said it is fighting the lawsuit arguing that the investors who bought the securities were sophisticated and even performed better than similar loans from other banks. “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,” BofA spokesman Lawrence Grayson said, according to a report by CNN.

Bank of America ought to step up and do the right thing. It has already been implicated in bank fraud through entities like Countrywide that it purchased. In what is the largest settlement so far of a mortgage-backed securities class action lawsuit, the parties agreed, on April 17, 2013, to settle the litigation for $500 million. For BofA, its actions in the subprime mess are only the tip of the iceberg.

The 2012 National Mortgage Settlement between five banks, including BofA, provides extensive relief to borrowers in the form of loan modifications, refinancing, and even cash payouts as a result of “robo-signing.” That practice led to the banks signing foreclosure documents without always verifying the accuracy of the forms and existence of supporting documents. The settlement required the banks to pay a total of $25 billion to federal and state governments as well as to borrowers.

BofA, in a statement to the media following the settlement, said it has reviewed its policies and corrected any improper procedures: "The agreement references activities from over a year ago that have been addressed as we do all we can to modify loans when possible and to ensure foreclosures are fair when they are unavoidable."

It’s not just Bank of America that has come under scrutiny. The same day BofA was sued, the Swiss bank UBS said it is paying an additional $50 million to settle SEC charges that it misled investors into buying mortgage bonds sold in 2007. UBS, which did not admit nor deny wrongdoing, said the settlement marks the end of the SEC’s probes of its collateralized debt obligations backed by home mortgage securities.

The list of settlements goes on including Citigroup ($285 million on October19, 2011); JP Morgan Securities ($153.6 million on June 21, 2011; and Goldman Sachs ($550 million on July 15, 2010).

Bank of America is the poster child for fraudulent subprime mortgages. It (allegedly) committed almost $1 billion of mortgage fraud on its own and another $500 million through its now acquired bank, Countrywide. The bank has never cooperated with the government on any of the charges choosing, instead, to fight those with the result that the government will have to spend millions our hard earned tax dollars to defend the indefensible.

In my view, Bank of America acts with impunity and consistently fails to consider the public interest in its banking actions. The company culture is one of deceit, cover-up, and failure to accept responsibility for its actions. BofA needs to come clean and admit wrongdoing in the current subprime mortgage case. It does not do anyone any good to drag out the government’s investigation. The bank knows or should know it will be forced to admit its failings sooner or later and settle with the government. Why not retain some modicum of dignity and respect by doing the honorable thing now?

Blog posted by Steven Mintz, aka Ethics Sage, on August 9, 2013