U.S. Files Suit Against Bank of America Over Toxic Mortgage Securities

/ / Law Blog

On Tuesday, the U.S. Department of Justice filed suit against Bank of America for investor fraud after the bank allegedly mislead investors about the quality of loans tied to $850 million in residential mortgage-backed securities. While B of A has been deeply embroiled in litigation since the financial crisis – particularly after the acquisition of Merrill Lynch the notorious subprime lender Countrywide – this civil suit pertains to mortgages the Department of Justice states were originated, securitized, and sold by the bank’s own mortgage operations. Rather than subprime loans, Bank of America’s current suit involves their representation of prime jumbo mortgages, which were loans valued at more than $417,000 for a single-unit residence.

Bank of America is now facing parallel lawsuits from the U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC) for making misleading statements and for failing to disclose information about mortgages backing a sale of securities to institutional investors in 2008. Although Bank of America intends to dispute these claims, the complaint also addresses evidence that nearly half of the securitized mortgages did not meet the bank’s underwriting standards.

According to the Department of Justice’s complaint, Bank of America staff knew of the poor quality of their mortgage-backed securities. In fact, the complaint refers to several e-mails showing that staff within the company knew the loans were not suitable for prime jumbo A-credit securitization. The Justice Department claims that B of A’s motive was simply to rid itself of mortgages for which they would sustain losses upon default.

As a result, the bank added risky wholesale mortgages and low documentation Alt-A loans to the pool. Alt-A is a rating between prime and subprime, usually indicating low documentation provided by borrowers, such as not documenting stated income – which many believe is quite a significant detail. The U.S. government is alleging, however, that Bank of American portrayed them as prime loans that were vetted by their staff, even including wholesale mortgages that were once referred to as “toxic waste” by the bank’s former CEO.

Additional claims by the Department of Justice allege failures to disclose information about self-employed borrowers, a focus on quantity over quality loans, and an overall failure of due diligence on mortgages used in the securitization. While these civil claims may aid in recovering losses experienced by institutional investors, many still raise questions as to whether criminal charges may ever come and what smaller investors can do about their losses. For more information about these ongoing cases, or to discuss your particular case with a Florida securities arbitration attorney, contact our firm today.