Don’t get too excited. Even though a bank has been found guilty in a mortgage fraud case, it’s only by virtue of using a legal theory that extended the statute of limitations beyond the five year limit for the juicier ones, most important, securities fraud. And this is only a civil suit, which is expected to produce only modest fines, since the government alleged losses of $131 million (there could still be a punitive element in addition to restitution of losses). The positive elements of this verdict are that a former Countrywide executive, Rebecca Mairone, was also found guilty of fraud and thus will also be paying fines and the verdict could pave the way for civil suits.
The scam was a Countrywide program called “Hustle” which created a “swim lane” in the late 2007. The subprime market was pretty much dead and Countrywide was trying to increase its origination of prime loans to compensate. But Fannie and Freddie loans have more stringent lending criteria than subprime, and this program looked to have been determined to make a joke of those standards. Experienced loan underwriters were replaced with unseasoned ones and the program had financial incentives for speed of production. It was like turbocharging a car and taking out the brakes; a crash was inevitable, the only question was how bad it would be.
One criticism was that the government sued Bank of America based on the idea that the conduct hurt Bank of America. I don’t have a problem with that, but it does make explicit a problem with most of these cases: unless the board gets religion and starts shaking up management, fines like this don’t exert enough pressure on individuals to change behavior.
Key sections of the write-up at the Wall Street Journal:
The verdict marks a victory for the U.S. attorney for the Southern District, Preet Bharara, who is the first federal prosecutor to win a case by using a federal statute created during the savings-and-loan crisis. The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or Firrea, extends the statute of limitations for civil fraud to 10 years.
To sue under Firrea, the government had to establish that a federally insured financial institution was harmed by the fraudulent conduct. The government argued that Bank of America, a federally insured financial institution, harmed itself by exposing the bank to fallout from the conduct…
George Zelcs, a partner with the law firm Korein Tillery LLC, said Firrea gives “a broad range of targets, and couple that with a longer statute of limitations, and you’re going to be able to have more options on claims and who you can bring them against.”
William Black, a former federal regulator and professor at the University of Missouri-Kansas City law school, said Firrea is a useful tool because limited government resources make it hard for prosecutors to complete investigations in five years, the normal statute of limitations on fraud. “It’s a good thing that the law exists, and this shows you why five years is an insufficient statute of limitations given the complexity in these cases,” he said.
The saying is a half a loaf is better than none, but this is mere crumbs.