BofA May Face Fraud Claims for Defective Loans

By Hugh Son, Dawn Kopecki and Donal Griffin – Oct 5, 2011

Bank of America Corp. (BAC), the biggest U.S. lender, should face fraud claims after its Countrywide unit submitted faulty borrower data for federally insured mortgages, according to an audit by a U.S. watchdog.

Half of 14 loans reviewed had “material underwriting deficiencies” that resulted in more than $720,000 in losses, according to a Sept. 30 report from the Office of the Inspector General for the Department of Housing and Urban Development. A regional inspector general for HUD, Kelly Anderson, recommended that the agency’s lawyers pursue legal remedies against Charlotte, North Carolina-based Bank of America.

“Countrywide did not properly verify, analyze, or support borrowers’ employment and income, source of funds to close, liabilities and credit information,” Kelly wrote in the audit. “This noncompliance occurred because Countrywide’s underwriters did not exercise due diligence in underwriting the loans.”

Bank of America, which bought Countrywide Financial Corp. in 2008, is among lenders facing the most costs if the Federal Housing Administration rejects claims for reimbursement on defective government-guaranteed loans, Paul Miller, an FBR Capital Markets Corp. analyst, said in an Oct. 3 note. The U.S. said in May it may pursue other lenders after suing Deutsche Bank AG for more than $1 billion, accusing the firm of lying to the FHA while arranging mortgage insurance.

“This is exactly what we’re concerned about,” Miller said in an interview yesterday. “These loans were put together really sloppy. There were problems with the loans and the servicing. They can go after these banks as much as they want. The issue is, how deep do they want to go?”
‘Seriously Delinquent’

The average rate of “seriously delinquent” loans-to- claims in the area audited — Illinois, Michigan, Minnesota, Ohio, Wisconsin and Indiana — was 6.76 percent for Countrywide compared with a regional average of 3.59 percent, according to the report. Bank of America was the second-biggest FHA lender after Wells Fargo & Co. (WFC) during the fiscal year ended Sept. 30, 2010, with $22 billion in loans.

HUD’s inspector general identified 4,050 Countrywide loans originated between July 1, 2008, and May 26, 2009, that were at least 60 days overdue within their first six mortgage payments.

In one instance, Countrywide said a borrower earned $6,192 a month when pay stubs reflected their income at $4,377. In other cases, Countrywide failed to properly review bad loans to ensure they met HUD’s guidelines before submitting claims, the department said.

Bank of America should perform a review of all mortgages that defaulted within the first six months of their creation, implement a quality-control program, and repay the government for the $720,000 in losses, according to the report.
Report on Citigroup

The Federal Housing Administration, administered by HUD, provides mortgage insurance on loans to low- and middle-income borrowers, first-time borrowers and other would-be homeowners who can’t find traditional financing. The FHA pays claims to banks if a borrower defaults.

Bank of America disagreed with the audit’s findings and recommendations.

“While Bank of America recognizes that oversights may have occurred in some instances, such oversights by no means suggest that Countrywide intentionally disregarded FHA guidelines, sought to qualify negligible borrowers for FHA financing, or failed to take quality-control and compliance matters seriously,” Senior Vice President Linda Jacopetti said in a 35- page response to HUD dated July 19.
‘Isolated Occurrences’

The lax oversight reflected “isolated occurrences in a handful of cases among thousands of FHA loans originated” in that time, Jacopetti said.

Jumana Bauwens, a Bank of America spokeswoman, Lemar Wooley at HUD and Michael Zerega of the inspector general’s office declined to comment on the report.

CitiMortgage, a unit of Citigroup Inc. (C), was faulted in a separate inspector general’s report. A review of 68 loans showed the firm, led by Chief Executive Officer Vikram Pandit, 54, improperly submitted claims of almost $5 million, which should be returned to HUD, according to the audit, which covered 2010.

That case stems from an FHA program that let borrowers in default sell their homes to satisfy mortgage debts to New York- based Citigroup, even if the proceeds were less than the total owed. The FHA compensated the bank for the difference between the sale price and the debt, according to the report.

“Citi did not have adequate policies and procedures in place to ensure that it properly determined borrower eligibility to participate in the program,” according to the report.
Moynihan Saw ‘Risk’

Citigroup disagreed with the watchdog’s findings, according to the audit. Sean Kevelighan, a spokesman for the bank, said he couldn’t comment.

Borrowers increasingly rely on FHA-backed loans after the collapse of subprime lenders, according to Miller. If borrowers default, lenders can ask the agency to reimburse losses. The FHA covers about 10 percent of all mortgage debt outstanding, up from 4 percent in 2006, he wrote. The insurance program has $4.7 billion in capital against a $1 trillion portfolio, he wrote.

Bank of America CEO Brian T. Moynihan was asked during a June conference whether he was concerned that the FHA would reject the lender’s demands for refunds.

“I’d say it is a risk,” said Moynihan, 51. “All of us, as we think about the mortgage business, continue to think about how you do business with various counterparties if their behavior can change on you during stress times.”

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