U.S. sues Bank of America over alleged mortgage fraud

[Pythagorean]

The United States on Wednesday filed a civil mortgage fraud lawsuit against Bank of America Corp <BAC.N>, accusing it of deliberately generating and then selling thousands of toxic home loans that later defaulted to Fannie Mae <FNMA.OB> and Freddie Mac <FMCC.OB>.

http://www.cnbc.com/id/49536637

 

[Mentalist]

Honestly, when reading the topic title, I gasped hoping it wasn't something false. Finally! This, so far, is the best news of the week for me. Millions of people out of homes, having their lives wrecked off of greed. If there is one disgusting feature of a person/group I abhor, it's greed.

 

[russ_watters]

Millions of people out of homes, having their lives wrecked off of greed.

Partly their own greed, right...?

 

[Charmar]

Partly their own greed, right...?

I'll have to say I agree with you here.

It's not like Bank of America said here you must take these loans or we will shoot your dog.

 

[turbo]

Partly their own greed, right...?

Home ownership is a goal of many (most?) in the US. Is it greedy to want to buy a house when interest rates are low? Seems like good sense to me, until the banks crashed the market with their derivatives. It's OK to assign some blame to the home-owners, but they didn't create the bubble, nor did they bring it crashing down by bundling poorly-capitalized loans and selling them as highly-rated securities.

Our lives are not unlimited in scope (temporally) and our personal relationships are not bound to some ideal economic situations, nor do we have foresight. When one meets "that" significant other, and decides to take the plunge into home-ownership, it's pretty hard to blame them for buying in during a bubble. Young couples have enough challenges, as it is, without blaming them for macro-economic manipulations done by the big banks.

 

[Jack21222]

Partly their own greed, right...?

If listening to somebody who is supposedly an expert is greedy, then sure. People were being told they could afford something they couldn't. They were then told that housing prices never decline, so they could always sell it.

Well, my house is now worth less than it was worth in 2004 (I bought it in early 2006). I bought it for 123k, at its peak it was appraised for 150k (when I took out an equity line of credit to finish the basement to rent out), now according to Zillow, it's worth 87k.

Luckily, I was able to rent it out when I moved to Boston, so I'm breaking even on the mortgage, taxes, and maintenance, but others aren't so lucky.

I don't feel I was being greedy when I thought to myself "if something happens and I lose my job or have some other change in my life, I can just sell the house and at least break even." Then again, you're probably talking about people in different situations, taking out fancy no-interest loans and the like. But still, even though I wasn't being greedy, I am now stuck with this house for quite a long time with no way to get rid of it.

 

[russ_watters]

Jack, I bought a house during the bubble and I have no idea how big of a loan I could have gotten. The decision on how expensive of a house to buy was entirely mine. Making good spending decisions is one of the key competencies of adulthood.

The bank doesn't set limits on loan size to protect you, they do it to protect themselves.

 

[turbo]

But still, even though I wasn't being greedy, I am now stuck with this house for quite a long time with no way to get rid of it.

There is no way to invest carefully in boom-and-bust economies that are manipulated by large players. My wife and I bought this place with cash. No banks involved (apart from the vultures picking apart the seller). We put our old manse on the market, and I took care of the place (snow-removal, leaves, lawn-care, etc) until it eventually sold for almost twice what we had paid for it. Within a year, the buyers (Evangelicals with one income and home-schooled kids) defaulted, and my wife and I could have bought that property back for about what we paid for it ~30 years ago.

We could have bought it back and hung onto it until we got a fair price, but the repeated 15-20 minute drives there with snowblower, mower, etc to maintain the place and keep it looking nice was too much of a chore. Not such a bad neighborhood... Fire Chief, head loan officer for local savings bank, a couple of teachers, owner of a local trucking company, postmaster, commercial appraiser... Kind of a quiet place, but I didn't want to speculate when the big banks were calling all the shots.

 

[Jack21222]

Jack, I bought a house during the bubble and I have no idea how big of a loan I could have gotten. The decision on how expensive of a house to buy was entirely mine. Making good spending decisions is one of the key competencies of adulthood.

The bank doesn't set limits on loan size to protect you, they do it to protect themselves.

Nothing in my post was about my house being too expensive, or about the loan size. I could have gotten a 150k loan, but I didn't. The point was that the prices have collapsed such that no matter what house I bought, I would be underwater in it.

 

[Oltz]

Nothing in my post was about my house being too expensive, or about the loan size. I could have gotten a 150k loan, but I didn't. The point was that the prices have collapsed such that no matter what house I bought, I would be underwater in it.

No Matter what house?

Is this opinion or is this in some market that actually has data that shows every house sold from ~04 to the bubble burst is upside down?

Just curious I had not heard of any market "that" bad.

 

[turbo]

My wife and I bought this little place for cash. We put our old (too-big) house up for sale with a friend and eventually sold it near the peak of the market. Over beers, he and I talked about the mortgage market and home prices. Soon, he and his wife sold their renovated farm-house with detached garage and mother-in-law apartment just in time, and bought a small place very similar to ours. Not all home-owners are irresponsible.

Can't pick out molecules of water and assign individual responsibility for a flood.

 

[russ_watters]

Turbo - yes, indeed: I think everyone got a little delerious during the housing bubble and there is a lot of blame to spread around. I do have some sympathy for the homeowners since they were betting their own lives/money* whereas the banks and investment companies were betting other peoples' money.

Still, imo, recklessness is a stepping stone to fraud. And our government encourged the kind of recklessness that led to both, so to me our government is most to blame for all of this.

That said, it is good to see prosecutions and lawsuits come out of this. My primary complaint against TARP (and other related baliouts) is that it takes the risk out of the equation, which encourages the making of reckless mistakes. So dilligence in going after where recklessness turned to fraud (for home buyers too!) is important to me.

*My bet did not pay off and my house is still worth less than when I bought it 6 years ago, but because I didn't over-extend myself (much...), it hasn't been a significant problem.

 

[russ_watters]

Nothing in my post was about my house being too expensive, or about the loan size.

Uh, yeah, that's what the second sentence of your post said!
"People were beong told they could afford something they couldn't."

And people were told housing prices nnever decline?! By who? And what idiot would believe such nonsense?

 

[russ_watters]

No Matter what house?

Is this opinion or is this in some market that actually has data that shows every house sold from ~04 to the bubble burst is upside down?

Just curious I had not heard of any market "that" bad.

Well you can count mine as one that isn't.

 

[D H]

Home ownership is a goal of many (most?) in the US. Is it greedy to want to buy a house when interest rates are low?

Sometimes it was. If the house is well beyond the buyer's financial means and the buyer still goes through with the deal, then yes, there's greed on the buyer's part. There was a lot of greed during the housing bubble, and the buyers were a part of that greed-everywhere phenomenon. That said, banks and real estate agents did play a huge role in the whole mess. Some banks simply ignored that buyers were not qualified. Some actively encouraged buyers to commit fraud (e.g., lie about their income), and some even even set up sham reference agencies to help those buyers commit fraud. That of course is illegal, something for which those involved should be punished.

However, just because there were a lot of bad actors on the business side does not mean that the buyers were innocents. A lot of them were also guilty of fraud. The right response to "just lie a bit about your income and you'll qualify" is a resounding NO, not "wink, wink, OK".

 

[Jack21222]

Uh, yeah, that's what the second sentence of your post said!
"People were beong told they could afford something they couldn't."

And people were told housing prices nnever decline?! By who? And what idiot would believe such nonsense?

I thought you were referring to the latter part of my post, when I discussed my situation.

And yes people were told housing prices don't decline. Where were you a few years ago? They were being told this by virtually everybody, including people who are supposed to be experts. All sorts of "idiots" believed it. Is being an "idiot" by your standards justification for being taken advantage of by people who are supposed to be the experts?

 

[Oltz]

I thought you were referring to the latter part of my post, when I discussed my situation.

And yes people were told housing prices don't decline. Where were you a few years ago? They were being told this by virtually everybody, including people who are supposed to be experts. All sorts of "idiots" believed it. Is being an "idiot" by your standards justification for being taken advantage of by people who are supposed to be the experts?

So no responsibility for signing a contract as long as any expert tells you something general with no regard for your particular circumstance.

Saying in general X retains value well and tends to increase in value over the long term does not mean things can not change.

People took that to mean buy as large(as much of) of an X as you possibly can even if you can not afford it now. They hoped they could "grow into" their mortgage payment and if they couldn't at least they could sell for a profit anyway if it came to that.

This is how bubbles work assumed permanent growth and or infinite funding available at what appears to be can't loose rates. Like the eventual Gold bubble or the "higher education" bubble that we are still buying into. One is propped up by lack of faith in government and the other is propped up by the government.

Nobody was forced to sign a loan nobody guaranteed they would be able to get out of the loan without suffering loss if things changed the government forced lenders to consider sub prime candidates. The banks not wanting to carry the sub-prime debt sold off those loans to others who bundled them with an aggregate of other quality of loans and resold them to dilute the risk. Some people went to far.

Stick to the standard advice and don't sign something you do not intend to pay for.

30 years is a long time and between inflation and future growth I imagine very few will truly end up upside down on the loans they signed. That doesn't help people who "need" to move for one reason or another but it should be a factor in the choice to move.

Of course the "idiots" who took on a loan they could never afford are being foreclosed on and rightfully.

 

[nitsuj]

Partly their own greed, right...?

Let's assume the greed on both ends of the deal nets to zero.

The bank has due diligence before issuing the loan, seems a new product made that a bit of an issue. Where "shi t" mortgages could be lumped together and hidden from proper evaluation, then sold as a single product.

In Canada there are some legislated terms, such as the maximum length a mortgage can be, minimum down payment, "First Time Home Buyers" agency of sorts.

All things in place to protect the state as a whole, not the individual. Perhaps better said, to protect capitalism.

Because of "for profit", the BoA has an strict interest to generate profits. The Gov' should have an interest in protecting it's economy from the menace(s) of greed. i.e. over fishing, over logging, "over" leveraging/loaning. Yes it should be very strictly regulated.

 

[russ_watters]

I thought you were referring to the latter part of my post...

Ok...so does that mean you are retracting what you said earlier when you said "People were being told they could afford something they couldn't" and the implication that the homeowner bears no responsibility for making a bad purchase? You agree now that you were wrong to say/implly that, right?

And yes, people were told housing prices don't decline...They were being told this by virtually everybody...

Who? I'm asking for a source, not a repeat of the claim. I certainly never heard it.

Jack, the fact a great many economic indicators are cyclical is so basic, it is tough to fathom anyone ever saying or anyone ever believing that housing prices never decline. It's like suggesting the stock market doesn't decline or the economy never declines. All one has to do is look at a historical graph of housing prices to know that it isn't true: htt://www.jparsons.net/housingbubble/

A simple claim, so obviously wrong -- yes, I think it is idiotic for someone who is in the process of buying a home to be so ignorant that they would believe that.

Is being an "idiot" by your standards justification for being taken advantage of by people who are supposed to be the experts.

Jack, I didn't claim that no one was taken advantage of -- heck, taking advantage of people is practically the definition of salesmanship!* But by the same token, your first post implies homeowners bear no responsibility for the bad business deals they made. That's ludicrous. It is every adult's job to educate themselves and make sure they understand what they are getting themselves into when it comes to basic life decisions, like buying a car or house.

*I recently bought a car. I was very upfront with the salesman I dealt with first, telling him exactly what I wanted and that I did my homework and wanted fair treatment up front (with an anecdote to prove it). I told him that if he was fair with me, I wouldn't even shop anywhere else, and I meant it. Then he tried to take advantage of me by bait-and-switching me on the price, so I used him to bargain-down another dealer and bought the car from the other dealer. This is life, Jack. That's how it works. You cannot cede responsibility for your decisions to someone else who doesn't even know what your best interests are, much less have any responsibility for them.

 

[nitsuj]

Of course the "idiots" who took on a loan they could never afford are being foreclosed on and rightfully.

Your post was well said,

Seems a minority of idiots really screwed over the economy to a large degree.

Wanna keep that minority so "powerful"? Always lend 'em money if they happen to ask?

Of course not, and it's nonsense to suggest they did have any power. The banks do, and they lent it to some "idiots".

 

[D H]

The discussion to date in this thread has been a bit off-topic with regard to the lawsuit filed by the government. The government is not suing Bank of America for the fraud supposedly committed on the house-buying public. It is suing Bank of America for the fraud supposedly committed on the US government (Fannie Mae and Freddie Mac are government-sponsored enterprises) in the packaging and selling of toxic assets.

 

[Oltz]

The discussion to date in this thread has been a bit off-topic with regard to the lawsuit filed by the government. The government is not suing Bank of America for the fraud supposedly committed on the house-buying public. It is suing Bank of America for the fraud supposedly committed on the US government (Fannie Mae and Freddie Mac are government-sponsored enterprises) in the packaging and selling of toxic assets.

I wonder if the fact that the toxic assets only existed because of government forced lending criteria will come into play at all.

High risk anything is dealt with by spreading the risk and balancing it with lower risk assets. If its investments or insurance policies or anything this is how business gets done. One company is uncomfortable with its holdings and finds another company that is willing to take the bet balanced with some stronger investments nobody complains until the average risk is so high nobody is safe or until a tsunami or some other shock comes along and even good assets fail.

I am really not sure how this is going to play out.

 

[edward]

I wonder if the fact that the toxic assets only existed because of government forced lending criteria will come into play at all.

High risk anything is dealt with by spreading the risk and balancing it with lower risk assets. If its investments or insurance policies or anything this is how business gets done. One company is uncomfortable with its holdings and finds another company that is willing to take the bet balanced with some stronger investments nobody complains until the average risk is so high nobody is safe or until a tsunami or some other shock comes along and even good assets fail.

I am really not sure how this is going to play out.

lets not get back into the: "It is all Jimmy Carters fault" garbage again. That has been disproved. It was greed plain old greed. Sub Primes sold for a higher price on Wall Street, because the interest rate was higher.

More than 84 percent of the sub prime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the sub prime loans to low- and moderate-income borrowers that year.
Only one of the top 25 sub prime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

 

[edward]

The law suit specificaly states BofA fraud in dealings with subsidiary Country Wide Mortgage.

To churn out more mortgage loans, Bharara said, Countrywide introduced a program called the "Hustle," shorthand for "High-Speed Swim Lane." It operated under the motto, "Loans Move Forward, Never Backward."

The program eliminated checks meant to ensure that mortgages were being made to borrowers who could afford them, according to the lawsuit.

For example, loan processors no longer had to complete worksheets that helped them assess whether income levels that borrowers entered on their loan applications were reasonable.

If processors entered a borrower's information into a computerized underwriting program and the program raised flags, employees were encouraged to change the numbers, the suit said.

It also said that bonuses were awarded based solely on the number of loans that an employee could generate, not on their quality.

http://www.csmonitor.com/Business/L...ca-sued-for-brazen-fraud-at-Countrywide-video

 

[Jimmy Snyder]

I'm greedy myself, but I'm not in any trouble. Greed is legal, fraud is not.

 

[edward]

I'm greedy myself, but I'm not in any trouble. Greed is legal, fraud is not.

It seems like every story I read about fraud always contains the word greed. Be careful when the tide goes out.

 

[Mentalist]

I'm greedy myself, but I'm not in any trouble. Greed is legal, fraud is not.

What is logical or reasonable about indulging in avarice when you are practically taking more for yourself and leaving the rest with nothing? Because you can isn't a good enough reason to do such things. Of course you are protected by laws, now, but that can change with time.

 

[russ_watters]

Dunno, it seems to work ok for kids on Halloween...

 

[SixNein]

Partly their own greed, right...?

For some involved, absolutely. We went through the housing meltdown because people were trying to get rich overnight off of the housing market.


Just to remind everyone with a hopefully clear explanation of what happened...

When banks issue loans on houses, they are normally looking at having money tied up in a long term investment. But thanks to some wall street financial engineering called mortgage backed securities, they were able to have a short turnaround.

1. People asked for home loans from a bank at some kind of interest plan and term, and the banks used the home itself as collateral.

2. The banks would take out loans themselves through 3rd parties like Fannie mae, and they would agree to pass along a certain amount of interest from the home buyer.

3. Fannie Mae would then package these loans as mortgage backed securities, and they would sell them to the public agreeing to pass along some of the interest.

4. Insurance was frequently taken out to cover the loan (think AIG).

The bold part in #1 is the most important thing here for two reasons:
1. Credit worthiness of the buyer didn't matter.
2. The entire system is betting on house prices increasing.

So what happened?
Banks would give home buyers a few years of low interest with higher interest down the road. As interest rates increased, the ability for these people to pay disappeared. As a result, banks would foreclose on the home. As the number of homes foreclosed, due to supply and demand, housing prices began to fall. But wait, remember that the house itself was used as collateral. So if I take out a loan for a house worth 500,000 and the price falls to 100,000, the bank just ate 400,000 dollars worth of bad debt. But wait.. They were passing that debt off and off and off. So insurance tanked and Fannie tanked. The people who were investing (Fannie was selling to public) tanked.

At any rate...
There was some people in the home buying business taking out loans and trying to sell the houses for a profit. Now that I think about it, I even recall some "Get Rich Quick" commercials on this very topic.

There was some people who was going by the banks judgement. Banks have historically been conservative, and people were trusting them. But they aren't as big of a variable in this as one might think. The system was going to collapse if housing prices fell for any reason.

Wall Street knew from day one of making these schemes that it was wrong. But the opportunity to get rich quick outweighed criminal risk.

What kills me about this whole thing is the lack of criminal investigation and charges. It's painfully obvious that both democrats and republicans are in bed with wall street. Those of us who didn't participate in this business got flat out robbed. Where is demand for justice?

This scheme should also make one weary of the Student Loan market.

 

[Evo]

Partly their own greed, right...?

I don't feel sorry for the people that lied and did illegal things in order to fraudulently obtain a house they knew they could not afford.

My first husband and I considered gettting a bigger home when we were in our early 20's, We had a brand new home that was just built, had only lived there 18 months, but saw a new home being built that we liked more. The lender told us to have my mom "gift" us $10k, then after the deposit was confirmed, we could return it to her. We were told all kinds of "tricks" we could do to qualify for a much larger home than even the one we were wanting.

We were approved. Then common sense kicked in and we told the salesman that we couldn't afford the house, (we actually could afford it since our pay for both of us was increasing), but we didn't want to gamble on future earnigs. We were not only let out of the deal, we got our earnest money (all $500) back.

People that go along with the lies, the fraud, the "tricks" deserve to lose their home, they are crooks, to be honest. They are just as bad as the lenders that give them "options" to get approved. I have no sympathy for these people. They know they don't qualify, they know they can't afford it. They took a gamble and lost. boohoo.

 

[SixNein]

I don't feel sorry for the people that lied and did illegal things in order to fraudulently obtain a house they knew they could not afford.

My first husband and I considered gettting a bigger home when we were in our early 20's, We had a brand new home that was just built, had only lived there 18 months, but saw a new home being built that we liked more. The lender told us to have my mom "gift" us $10k, then after the deposit was confirmed, we could return it to her. We were told all kinds of "tricks" we could do to qualify for a much larger home than even the one we were wanting.

We were approved. Then common sense kicked in and we told the salesman that we couldn't afford the house, (we actually could afford it since our pay for both of us was increasing), but we didn't want to gamble on future earnigs. We were not only let out of the deal, we got our earnest money (all $500) back.

People that go along with the lies, the fraud, the "tricks" deserve to lose their home, they are crooks, to be honest. They are just as bad as the lenders that give them "options" to get approved. I have no sympathy for these people. They know they don't qualify, they know they can't afford it. They took a gamble and lost. boohoo.

Wall street knew without any doubt that it was committing fraud. Politicians went to bat for them and tried to deflect blame and responsibility to a shocking degree of success. Even if those people could afford those loans, the way wall street setup their financial engineering meant that the whole system would have collapsed if housing prices fell for any reason.

 

[Jimmy Snyder]

What is logical or reasonable about indulging in avarice when you are practically taking more for yourself and leaving the rest with nothing? Because you can isn't a good enough reason to do such things. Of course you are protected by laws, now, but that can change with time.

This is rather vague. How would a law against illogic and unreasonableness while indulging in avarice be worded?

 

[russ_watters]

What kills me about this whole thing is the lack of criminal investigation and charges.

Um...doesn't the OP kinda contradict that?

Yes, I know: Not enough for your taste.

[separate post]
Wall street knew without any doubt that it was committing fraud.

Except that nothing you described in that long, detailed and accurate (as far as I can tell) previous post of yours was illegal. Near as I can tell, very little (fractionally) of what caused the meltdown was illegal. It was mostly just bad decisions.

That said, I do sympathize with the desire to see heads roll over bad decisions due to the damage caused. As an engineer, if a building that I design collapses due to an error I made (I'm a mechanical engineer, not a structural engineer, but just go with it), I'd probably end up in jail for manslaughter. Finance people don't have such responsibilities, even though the injuries they cause with their mistakes are still very real.

 

[russ_watters]

I don't feel sorry for the people that lied and did illegal things in order to fraudulently obtain a house they knew they could not afford.

How about people who did legal things, to buy a house they knew or should have known they couldn't afford?

 

[Pythagorean]

My sympathy goes to the people who got laid off while facing rising food and gas prices because of the actions of both borrowers and lenders.