Why the lawsuit against BoA/Countrywide could be a blockbuster

The name on the lawsuit is “Bank of America,” but the key word to those in the Beltway is “Countrywide,” one of the most reckless — and politically connected and active — companies involved in the subprime meltdown.

First, the key parts of the AP story about the lawsuit, in which the government is seeking more than $1 billion in damages:

U.S. Attorney Preet Bharara said Countrywide Financial, which was later bought by Bank of America, churned out mortgage loans from 2007 to 2009 without making sure that borrowers could afford them.

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” Bharara said in a statement. He said the suit was partly to recover money that Fannie and Freddie lost from defaulted loans.

Bank of America had no immediate comment.

Countrywide sold the loans to Fannie Mae and Freddie Mac, which were left to pay for the loans when they defaulted, according to the lawsuit. Fannie and Freddie were effectively nationalized in 2008.

According to the lawsuit, Countrywide used a process called “the Hustle,” shorthand for “High-Speed Swim Lane.” The idea was that mortgage loans, as they were being processed, would “move forward, never backward.”

The lawsuit alleged that Countrywide traded quantity for quality and eliminated underwriters, even from mortgage loans for which borrowers did not have to get their income verified.

Instead, loan processors simply entered data into an automated underwriting system, and if the system gave the go-ahead, “no underwriter would ever see the loan,” the lawsuit alleged.

With few checks and balances, there was “widespread falsification” of the data entered into the program, Bharara charged.

But this is not your run-of-the-mill Wall Street greed story. Not when Countrywide is involved.

In their book “Reckless Endangerment,” New York Times columnist Gretchen Morgenson and housing-finance expert Joshua Rosner offer a damning portrayal of Countrywide’s efforts to win friends and influence people on Capitol Hill. The company was joined at the hip with Fannie Mae and Freddie Mac — here’s another account of that — and regularly rewarded members of Congress, members of their staffs and families, and administration officials with cut-rate mortgages. Perhaps you’ve heard of the “Friends of Angelo” program, as in Angelo Mozilo, Countrywide’s former CEO.

The reward for all this generosity, Morgenson and Rosner report, was a little more benefit of the doubt from Washington when Countrywide’s reckless practices began to attract scrutiny.

One big question for the lawsuit will be whether Bank of America, which acquired the liability for these excesses when it bought Countrywide in 2008, has the goods (and the nerve) to name names during these legal proceedings. Might BoA be in possession of records that more closely tie the receiving of benefits by members of Congress or the bureaucracy to interventions by them on the company’s behalf? Might it be able to shed even more light on how Fan and Fred worked hand in glove with rogue companies like Countrywide to turbocharge the mortgage mania?

Maybe BoA has the goods, maybe it doesn’t. Maybe it will use what it does have to procure a favorable settlement, or maybe this lawsuit will give us a clearer picture of the symbiotic partnership between Big Finance and Big Government that nearly brought the country to its knees.

– By Kyle Wingfield

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