Yesterday a jury found Bank of America liable for knowingly selling defective mortgages. Bank of America’s Countrywide unit was ground zero for the housing crash by degrading credit standards, creating horrendously unstable mortgages, then pushing their poisonous products onto the world.
A federal jury in Manhattan sided with prosecutors who alleged Countrywide Financial Corp. churned out risky home loans in a process called “the Hustle” and then sold them to mortgage giants Fannie Mae and Freddie Mac.
The Calabasas company, once considered the crown jewel of American mortgage lending, made big profits unloading loans that were later rendered worthless during the housing crisis in 2008.
“The Hustle” is comes from HSSL, or the “high-speed swim lane.” The program tied bonuses to how fast executives could originate loans to be sold in derviatives. Not surprisingly, given the incentive structure, credit quality was sacrificed for speed and profit. The results were a financial crisis which in this case also involved Fannie Mae and Freddie Mac.
Bank of America has to be regretting its Countrywide acquisition.
Countrywide, the troubled mortgage originator that Bank of America bought in 2008, has been a morass of problems. While the bank bought Countrywide for $4 billion in 2008, analysts say they believe it has so far already paid close to $50 billion in fines and settlements. In light of Wednesday’s decision, that figure is likely to continue to rise.
The bank faces other investigations and lawsuits stemming from its mortgages. In August, federal prosecutors in North Carolina sued Bank of America, accusing it of understating the risks of the mortgages underpinning some $850 million in securities.
When fraud is your business model that’s the risk you run. Then again, it is kind of a mixed message to give Bank of America billions from TARP and secret Fed Loans then sue them. Of course shutting down these institutions is unthinkable.