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B of A Should Pay $863M in Fannie Mae Case, U.S. Says

NOV 11, 2013 10:35am ET
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Bank of America Corp. should pay the maximum penalty of $863 million for selling defective loans to Fannie Mae and Freddie Mac, given the egregiousness of the fraud, U.S. prosecutors told a federal judge.

Bank of America’s Countrywide unit was found liable by a jury in Manhattan federal court last month for selling the government-sponsored entities thousands of defective loans in the first mortgage-fraud case brought by the U.S. to go to trial.

The bank’s fraud was “simple but brazen,” prosecutors wrote in a court filing last night. “They made bad loans and they knowingly sold those bad loans as good loans to cheat Fannie Mae and Freddie Mac out of money.”

Given the measure of Countrywide’s culpability, the public injury and the bank’s ability to pay, the government said the maximum penalty under the law was warranted—the gross loss suffered by the entities under the scheme.

U.S. District Judge Jed Rakoff, who presided over the trial, told lawyers last month he would determine the amount of any penalty at a later date. Arguments in the matter are scheduled for Dec. 5.

The filing represents an increase over what the government said the gross losses were last month. At the time, Assistant U.S. Attorney Pierre Armand asked Rakoff to impose a penalty of $848 million. Armand also offered a more lenient option, telling Rakoff he could fine Countrywide about $131 million, the estimated net losses to the two entities.

The jury also found former Countrywide Financial Corp. executive Rebecca Mairone liable for defrauding the U.S. Mairone was the only individual named as a defendant in the government’s lawsuit. In its Nov. 8 filing, the government asked the court to impose a penalty on her commensurate with her ability to pay.

“We believe the filing overstates the volume of loans and appropriate measure of damages,” Lawrence Grayson, a spokesman for the Charlotte, N.C-based bank, said in an email.

Marc Mukasey, a lawyer for Mairone, had said his client would appeal. He said in an email that he will argue against the imposition of any penalty for Mairone.

Countrywide, based in Calabasas, Calif., was once the biggest U.S. residential home lender, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The bulk of them were sold to investors as mortgage-backed securities. Bank of America acquired Countrywide in 2008.

Prosecutors alleged that a division of Countrywide in August 2007 initiated a loan program called “High Speed Swim Lane,” or HSSL, that ran until 2008.

Countrywide earned at least $165 million using HSSL, allowing the company to maintain revenue in a “cratering” market for subprime mortgages, prosecutors told the jury in closing arguments. Government-sponsored enterprises, or GSEs, such as Fannie Mae and Freddie Mac bought single-family mortgages from lenders.

The U.S. last year joined the whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell.

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