“When the story of the lack of prosecutions from the financial crisis is finally written, the most important issue will be how difficult it turned out to be to prove fraud” The New York Times.

Shoddy mortgage practices were largely to blame for the Great Recession of 2007-2009.  One of the key players identified in contributing to the housing bubble and financial crisis is Countrywide, a mortgage lender acquired by Bank of America in 2008.

Countrywide was running a program known as the High-Speed Swim Lane, or “hustle” which resulted in mortgages that did not meet the requirements set forth in contracts permitting them to be sold to Fannie Mae and Freddie Mac.  But Countrywide sold these unqualified mortgages to Fannie and Freddie anyway.

In 2012, the Justice Department used a provision of the Financial Institution Reform, Recovery, and Enforcement Act (FIRREA) to sue the banks that contributed to the financial crisis.  Federal prosecutors took Countrywide to court in 2013 and accused the company of fraud, passing off their subprime mortgages as contractually qualified.

A jury in the 2013 case found that Countrywide engaged in a fraudulent scheme to sell questionable mortgages, which linked bonuses to how fast bankers could originate loans.  Presiding Judge Rakoff described it as “brazen fraud…driven by hunger for profits and oblivious to the harms thereby visited.”  Judge Rakoff imposed a civil penalty of $1.27 billion on the bank.

Bank of America filed for an appeal, and the federal appeals court overturned the jury’s verdict in May 2016.  A three-judge panel ruled that federal prosecutors had failed to prove that Bank of America’s Countrywide unit had defrauded Fannie Mae and Freddie Mac when it sold them troubled loans.

Fraud is defined as a knowingly false statement, made with intent to defraud.  The judges argued that Countrywide made no claims about whether or not the mortgages they sold to Fannie Mae and Freddie Mac met the contractual requirements.  There was no evidence that Countrywide made a false statement when it signed the contracts with Fannie and Freddie, only that it later decided to breach the agreement by selling bad mortgages without alerting the companies to that fact.

So, basically, greed and Wall Street wins again.  The fact that the bank was knowingly passing off subpar mortgages without disclosing that fact and hoping no one would notice is apparently not sufficient grounds for a judgment.  In fact, staying silent about it turned out to be their saving grace!

The other thing I don’t understand is where are all the checks and balances?  Why are Fannie and Freddie blindly buying up loans that they haven’t reviewed?  If someone had been checking these faulty loans from Countrywide and others, perhaps they would have caught this mess a lot sooner.