A new lawsuit against Bank of America illuminates the warped incentives that helped inflate the housing bubble and contributed to its calamitous collapse. Filed last week by the U.S. attorney in Manhattan, it focuses on allegations that Countrywide Financial Corp. (which Bank of America bought in 2008) pumped up the volume of loans it issued and then sold to Fannie Mae and Freddie Mac, regardless of their suspect quality.
Manhattan U.S. Atty. Preet Bharara contends that Countrywide and Bank of America "cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners and concealed the resulting defects" when they peddled the loans to Fannie and Freddie. The result, the government asserts, was more than $1 billion in losses at those two institutions, whose shortfalls are now covered by the taxpayers. Bank of America hasn't denied the allegations about shoddy underwriting but insists that it has repurchased all the bad loans that Fannie and Freddie have asked it to take back.
Bharara's office has filed similar suits against Wells Fargo and four other banks for allegedly making loans recklessly, then fraudulently claiming guarantees for them from the Federal Housing Administration. The case against Wells Fargo is pending; the other four banks settled earlier this year.