A federal jury ruled yesterday that Countrywide, now owned by Bank of America, defrauded Fannie Mae and Freddie Mac by selling them defective mortgages in advance of the great financial crisis of 2008. A former Countrywide executive, Rebecca Mairone, was also found liable in the case.

Whistleblower Exposed Countrywide’s “Hustle” Program

The Justice Department lawsuit concerned a Countrywide program established in 2007 called the High-Speed Swim Lane — nicknamed “the Hustle.” The complaint arose from disclosures made by a former Countrywide employee who became a “whistleblower,” exposing evidence of substantial misconduct by Countrywide. The government took on the lawsuit in the name of that former employee, and asserted that Countrywide’s “Hustle” program was “intentionally designed to process loans at high speed and without quality checkpoints, and generated thousands of fraudulent and otherwise defective residential mortgage loans.” Speed in generating loans, not meaningful assessments of whether the borrowers even qualified for those loans, was what was most important to Countrywide, according to the former employee who blew the whistle on Countrywide’s practices.

These loans were then misrepresented by Countrywide to Fannie and Freddie as being of very high-quality. Fannie and Freddie were told Countrywide had “strengthened its underwriting guidelines and scaled back on riskier loan products,” the complaint says. The jury’s verdict essentially validates in full the allegations made in the complaint. News reports indicate that the federal government will seek penalties exceeding $800 million and the whistleblower will collect a portion of the amount that is awarded.

Good News for Correspondent Lenders Facing Repurchase Demands

What does this case result (and news reports of huge settlements about to be paid by Chase and others to government agencies) mean for correspondent lenders facing repurchase and indemnification demands from Countrywide/Bank of America and other major banks? It is hard not to see such results as good news. There are several reasons for that. First, cases like this go a long way towards a strong “unclean hands” defense against the big bank. Moreover, bear in mind that this case pertained to loans that Countrywide itself originated and funded, and its internal underwriting practices (or lack thereof) with regard to those loans. It also hinged to a considerable extent on the government’s ability to establish that Countrywide essentially deliberately misled Fannie and Freddie when selling these loans.

Can BofA’s attorneys find a way to spin this setback to BofA’s advantage?  They would have an awfully difficult task. They may simply try to dismiss this result as “apples and oranges” in relation to their alleged rights under their contracts with correspondent lenders.

On the surface, it’s a reasonably valid distinction — but, unless they succeeded in barring any reference to this case and other indicia of how Countrywide actually operated, they would have to take a truly illogical position. They would have to show that, while they demonstrably had no real interest in the quality of the loans that they themselves originated and funded, they cared deeply that everything be letter-perfect when they acquired the same types of loans, underwritten to the same lax specifications, from third parties (so that those loans, too, could be sold to Fannie and Freddie). Likewise, they will have a difficult time claiming that their alleged losses as to loans acquired from correspondent lenders and re-sold to the government were NOT caused by Countrywide’s own jury-determined practice of deliberately misleading Fannie and Freddie about what those entities were buying.

Sometimes it takes a long time for the truth to come to light about who is truly responsible for allegedly defective products and shoddy underwriting practices. But it does come to light eventually, as the jury’s verdict reminds us.