Bank of America, one of the nation’s largest banks, was found liable Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.
The jury also found a top manager at Bank of America’s Countrywide Financial unit liable, pinning some — if not all — of the responsibility for the bad acts on an individual.
During the trial, federal prosecutors had accused Rebecca Mairone, a top manager at Countrywide at the time, of having opted for quantity over quality in its mortgage writing program, which resulted in the bank churning out to unqualified buyers housing loans that were destined to fail.
In its case, federal lawyers claimed that Mairone, who now works at JPMorgan Chase, led a program nicknamed the “hustle,” derived from HSSL, or the “high-speed swim lane.”
The program linked bonuses to how quickly bankers could originate loans. As a result, the credit quality of the borrower was given short shrift, the government contended. When the loans were sold to mortgage giants like Fannie Mae and Freddie Mac, they failed, generating more than $1 billion in losses.
The civil case, which has been tried in a U.S. District Court in New York, follows close on the heels of JPMorgan’s tentative agreement, in which the bank is said to be ready to pay $13 billion in fines and payments to settle with various state and federal authorities for its own exposure to the mortgage mess.
Countrywide, the troubled mortgage originator that Bank of America bought in 2008, has been a morass of problems. While the bank bought Countrywide for $4 billion in 2008, analysts say they believe it has so far paid close to $50 billion in fines and settlements. In light of Wednesday’s decision, that figure is likely to continue to rise.
The bank faces other investigations and lawsuits stemming from its mortgages. In August, federal prosecutors in North Carolina sued Bank of America, accusing it of understating the risks of the mortgages underpinning some $850 million in securities.
In a statement, Preet Bharara, the U.S. attorney in New York, who has scored a number of legal victories as part of a campaign against crime on Wall Street, hailed the jury’s decision.
“In this case, Bank of America chose to defend Countrywide’s conduct with all its might and money, claiming there was no case here,” he said. “The jury disagreed. This office will never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public.”
Bank of America stressed that the program was no longer in force and that the bank was weighing its next steps.
“The jury’s decision concerned a single Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” a bank spokesman, Lawrence Grayson, said in an emailed statement. “We will evaluate our options for appeal.”
The jury ruling held Mairone liable on the one fraud charge brought against her, although it is unclear what penalty she may face.
“She’s a model of honesty, integrity and ethics,” said her lawyer, Marc Mukasey, a partner at Bracewell & Giuliani. “She never engaged in any fraud because there was no fraud. We’ll fight on.”
Consumer advocates have long pushed for accountability among the top managers, arguing that, given the extensive losses suffered by homeowners and investors during the mortgage crisis, top executives at the firms in question should pay a price. Angelo Mozilo, the former chief executive of Countrywide Financial, never faced criminal charges. In 2010, however, he agreed to pay $67.5 million to settle a civil fraud case brought by the Securities and Exchange Commission.
In the latest lawsuit, prosecutors have asked that Bank of America pay a fine of $848 million, although the judge presiding over the case, Jed Rakoff, will determine the penalty.
The government’s case piggybacked on a whistle-blower case originally brought by Edward O’Donnell, a former Countrywide executive who testified in the suit, who will reap a portion of the fine.
While the suggested fine pales in comparison to the check that JPMorgan is expected to write, lawyers point out that the eventual cost could far exceed what the government has asked for, because the jury’s decision is likely to spur a torrent of class-action suits that could cost Bank of America billions of dollars in settlement payments.
Bank of America has spent the better part of the year trying to convince investors that its devastating mortgage problems were an issue of the past, and to some extent the bank has been successful. Its stock increased 54 percent in the past year.
Still, the weight of Countrywide’s mortgage exposure hangs heavy over the bank and, compared with JPMorgan, Bank of America trades at a deep discount to its book value — a sign that investors believe that toxic housing loans will bedevil the bank for years to come.