New Lawsuits Show Bank of America Probably Lied to Investors, Too

Less than a week after Bank of America's (NYSE: BAC  ) 10-Q filing gave a glimpse of new legal hassles looming on its horizon, the U.S. Department of Justice and the Securities and Exchange Commission have made their move. Attorney General Eric Holder announced that the DOJ and the SEC have filed suit in Charlotte, North Carolina, over $850 million of residential mortgage-backed securities B of A originated in 2007, and then sold in 2008.

The lawsuits are not a surprise, and suits filed against B of A over crummy mortgages are painfully commonplace. These particular actions, though, are a little different from other legal cases regarding mortgage bonds. These suits revolve around MBSes filled with non-government backed, prime jumbo loans -- and since there is no mention of Countrywide, those loans were apparently originated by Bank of America itself.

And, much like the allegations that B of A deceived and lied to homeowners attempting to refinance their troubled home loans, the government is contending that the bank fibbed to investors purchasing at least two of these toxic securities -- hiding pertinent facts that, if revealed, may have sent investors running for the exits.

A jumbo meltdown
Jumbo loans, generally reserved for the wealthy, had fallen out of favor in the years immediately following the financial meltdown, but they have begun to crop up again over the past year or two. Both Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) have been active in the jumbo market lately, loaning out funds in excess of $417,000 for pricey properties, but using more stringent rules than they did back in 2007.

Notably, pre-crisis jumbo loans were being handed out left and right, which resulted in default rates of 6.9% in late 2008, compared with conventional prime loan default rates of 2.1%. In 2008, Bank of America, JPMorgan, and Wells wrote over one-quarter of the jumbo mortgages, which were considered riskier since neither Fannie Mae nor Freddie Mac would back them.

Lending standards were ignored
The lawsuits allege that Bank of America did not comply with its own underwriting standards in regards to these loans. In one of the MBS pools, the government states that over 40% of the nearly 1,200 mortgages contained therein did not adhere to B of A's own parameters.

In addition, more than 70% of those loans were created through Bank of America's wholesale channel, meaning third parties originated the loans. Though B of A knew these channels were delivering loans of dubious quality, it failed to alert investors to this fact.

Because investors were ignorant of these complications, they unknowingly bought into an investment that will, according to the government, likely surpass $100 million in losses. 

A big problem for B of A -- and maybe others
Countrywide has been a big pain in the balance sheet for Bank of America, but it seems that it can't be blamed for this problem. It also looks like this might be just the tip of the jumbo MBS iceberg: The Wall Street Journal has estimated that, between 2002 and 2006, banks wrote $557 billion of jumbo mortgages annually -- 40% of which were bundled into securities that were later sold to investors.

Will JPMorgan and Wells be next on the jumbo hit list? Perhaps, and there may be more of this kind of trouble for Bank of America, as well. For the nation's biggest banks, the financial crisis may be over, but its legacy will continue to be a drag on their bottom lines – and their reputations.

Stories like these show that not all investments are what they seem. For everyday investors like you and me, however, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 07, 2013, at 12:20 PM, srcpl wrote:

    Eric Holder's ignorance will come out in this case, too ! SEC is tagging along for political reasons only !

    Bank of America's attorneys will eat the DOJ and SEC for lunch. Our so-called government is only hurting the consumer !! Eric Holder should spend his time on the IRS SCANDAL , the BENGHAZI SCANDAL, the FAST & FURIOUS SCANDAL, the NSA SCANDAL and all the other OBAMA SCANDALS , and leave the banks alone !! Bank of America will kick their butts !!

  • Report this Comment On August 07, 2013, at 12:34 PM, mweston81 wrote:

    I hardly feel sorry for investors trying to hike up prices on the American people for their own greed. Being lied to by banks should be something they should have been taught during those investor seminars and business 101.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2583568, ~/Articles/ArticleHandler.aspx, 10/1/2014 12:49:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement