US government sues Bank of America

Bank accused of fraud over $850m worth of securities based on mortgages that authorities say were riskier than stated

Bank of America was dishonest over the issue of $850m in mortgage securities, the government alleges

Bank of America was dishonest over the issue of $850m in mortgage-backed securities, the US government alleges. Photograph: Andrew Gombert/EPA

The US is suing the Bank of America for investor fraud over the sale of $850m worth of residential mortgage-backed securities.

The lawsuits are the latest legal headache for the second-largest US bank, which has already agreed to pay in excess of $45bn to settle disputes stemming from the 2008 financial crisis.

While most of the cases Bank of America has already confronted pertain to its acquisitions of brokerage Merrill Lynch and home lender Countrywide, the two civil lawsuits filed on Tuesday pertain to mortgages the government said were originated, securitised and sold by Bank of America’s legacy businesses.

The residential mortgage-backed securities at issue, known as RMBS, were of a higher credit quality than subprime mortgage bonds and dated to about January 2008, the government said, months after many Wall Street banks first reported billions of dollars in writedowns on their holdings of subprime mortgage securities.

The justice department and the US Securities and Exchange Commission filed parallel lawsuits in US district court in Charlotte, North Carolina, accusing Bank of America of making misleading statements and failing to disclose important facts about the pool of mortgages underlying a sale of securities to investors in early 2008.

The investors included the Federal Home Loan Bank of San Francisco and Wachovia Bank National Association, the justice department lawsuit said.

Bank of America, which is based in Charlotte, responded to the lawsuits with a statement: “These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that.

“The loans in this pool performed better than loans with similar characteristics originated and securitised at the same time by other financial institutions. We are not responsible for the housing market collapse that caused mortgage loans to default at unprecedented rates and these securities to lose value as a result.”

Bank of America shares fell 1.1% to close at $14.64 on the New York Stock Exchange following news of the lawsuits. Bank of America had warned in a securities filing on Thursday about possible new civil charges linked to a sale of one or two mortgage bonds.

According to the lawsuits Bank of America made misleading statements and failed to disclose important facts about the mortgages underlying a securitisation named BOAMS 2008-A. More than 40% of the 1,191 mortgages in the securitisation did not comply with the bank’s underwriting standards, according to the complaint.

“These misstatements and omissions concerned the quality and safety of the mortgages collateralising the BOAMS 2008-A securitisation, how it originated those mortgages and the likelihood that the ‘prime’ loans would perform as expected,” the justice department said in its statement.

In 2011 Bank of America’s shares fell more than 20% in a single day after American International Group filed a $10bn lawsuit accusing the bank of mortgage fraud. Weeks later Warren Buffett’s Berkshire Hathaway Inc swooped in with a $5bn investment to shore up confidence in the bank. Since then Bank of America’s stock has more than doubled as the bank has announced agreements to settle major disputes and investors have regained confidence in its outlook.

Among major deals the company agreed to an $8.5bn settlement with mortgage-backed securities investors, a $1.6bn settlement with bond insurer MBIA Inc and a settlement worth more than $10bn with Fannie Mae , the government-controlled mortgage finance provider.

The US attorney general, Eric Holder, said on Tuesday that Barack Obama’s Financial Fraud Enforcement Task Force, which brought the latest lawsuit against Bank of America, “will continue to take an aggressive approach to combatting financial fraud and uncovering abuses in the residential mortgage-backed securities market” and was pursuing “a range of additional investigations”.

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