Housing Finance Fraud Suit

The US Attorney for the Southern District of New York issued a press release about “the first civil fraud suit brought by the Department of Justice concerning mortgage loans sold to Fannie Mae or Freddie Mac” which are government-sponsored enterprises (GSEs) and financial services corporations created by the United States Congress. The 46 page Complaint in U.S. ex rel. O’Donnell v. Bank of America Corp. and Countrywide Financial Corp. seeks to recover treble damages and penalties under the False Claim Act, 31 U.S.C. §3729 (“FCA”)and civil penalties under the Financial Institutions Reform, Recovery, Enforcement Act, 12 U.S.C. §1833a (“FIRREA”). The Complaint’s allegations center on a “streamlined” loan origination program at Countrywide known as the “Hustle” that removed controls on loan quality. The charges state that “there was widespread falsification” of data entered into an automated system for underwriting loans and that the lender “knowingly originated loans with escalating levels of fraud and other serious defects and sold them to the GSEs” despite these problems. This latest legal challenge for Bank of America could cost it $1billion.

To find out more on the subject of the government’s role in the U.S. residential mortgage market, see Brooklyn Law School Library’s copy of The Future of Housing Finance: Restructuring the U.S. Residential Mortgage Market edited by Martin Neil Baily (Call # HG2040.5.U5 F88 2011). The book examines the financial crisis of 2008 and the fundamental flaws in the U.S. housing finance market that contributed to the near collapse of America’s financial system. Given bipartisan agreement that government housing policies need to be reevaluated, this book looks at the Obama administration’s recommendations to reduce the role of Fannie Mae and Freddie Mac in housing finance, with the ultimate goal of replacing these GSEs with a private market that would become the primary source of mortgage credit bearing the burden of risk.